MUNICIPAL INVEST TR FD MONTHLY PMT SER 612 DEF ASSET FDS, 487, 1998-03-12

MUNICIPAL INVEST TR FD MONTHLY PMT SER 612 DEF ASSET FDS
487, 1998-03-12

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 12, 1998
REGISTRATION NO. 333-41287

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

------------------------------------------
AMENDMENT NO. 1
TO
FORM S-6
------------------------------------------

FOR REGISTRATION UNDER THE SECURITIES ACT
OF 1933 OF SECURITIES OF UNIT INVESTMENT
TRUSTS REGISTERED ON FORM N-8B-2

------------------------------------------

A. EXACT NAME OF TRUST:

MUNICIPAL INVESTMENT TRUST FUND
MONTHLY PAYMENT SERIES--612
DEFINED ASSET FUNDS

B. NAMES OF DEPOSITORS:

MERRILL LYNCH, PIERCE, FENNER & SMITH INC.
SMITH BARNEY INC.
PAINEWEBBER INCORPORATED
DEAN WITTER REYNOLDS INC.

C. COMPLETE ADDRESSES OF DEPOSITORS' PRINCIPAL EXECUTIVE OFFICES:

MERRILL LYNCH, PIERCE,
FENNER &
SMITH INCORPORATED
UNIT INVESTMENT TRUST
DIVISION
P.O. BOX 9051
PRINCETON, NJ 08543-9051 PAINEWEBBER INCORPORATED
1285 AVENUE OF THE
AMERICAS
NEW YORK, NY 10019

SMITH BARNEY INC.
388 GREENWICH
STREET--23RD FLOOR
NEW YORK, NY 10013
DEAN WITTER REYNOLDS INC.
TWO WORLD TRADE
CENTER--59TH FLOOR
NEW YORK, NY 10048

D. NAMES AND COMPLETE ADDRESSES OF AGENTS FOR SERVICE:

TERESA KONCICK, ESQ.
P.O. BOX 9051
PRINCETON, NJ 08543-9051 ROBERT E. HOLLEY
1200 HARBOR BLVD.
WEEHAWKEN, NJ 07087

COPIES TO: DOUGLAS LOWE, ESQ.
PIERRE DE SAINT PHALLE, DEAN WITTER REYNOLDS INC.
LAURIE A. HESSLEIN ESQ. TWO WORLD TRADE
388 GREENWICH STREET 450 LEXINGTON AVENUE CENTER--59TH FLOOR
NEW YORK, NY 10013 NEW YORK, NY 10017 NEW YORK, NY 10048

E. TITLE OF SECURITIES BEING REGISTERED:

An indefinite number of Units of Beneficial Interest pursuant to Rule 24f-2
promulgated under the Investment Company Act of 1940, as amended.

F. APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC:

As soon as practicable after the effective date of the Registration Statement.

/ x / Check box if it is proposed that this filing will become effective upon
filing on March 12, 1998, pursuant to Rule 487.

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<PAGE>
DEFINED ASSET FUNDSSM
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MUNICIPAL INVESTMENT 4.88% ESTIMATED CURRENT RETURN shows the estimated
TRUST FUND annual cash to be received from interest-bearing
MONTHLY PAYMENT SERIES 612 bonds in the Portfolio (net of estimated annual
(A UNIT INVESTMENT expenses) divided by the Public Offering Price
TRUST) (including the maximum deferred sales charge).
- ------------------------------4.86% ESTIMATED LONG TERM RETURN is a measure of
/ / DESIGNED FOR FEDERALLY the estimated return over the estimated life of
TAX-FREE INCOME the Fund. This represents an average of the yields
/ / DEFINED PORTFOLIO OF to maturity (or in certain cases, to an earlier
MUNICIPAL BONDS call date) of the individual bonds in the
/ / MONTHLY INCOME Portfolio, adjusted to reflect the maximum
/ / INVESTMENT GRADE deferred sales charge and estimated expenses. The
4.88% average yield for the Portfolio is derived by
ESTIMATED CURRENT RETURN weighting each bond's yield by its market value
4.86% and the time remaining to the call or maturity
ESTIMATED LONG TERM RETURN date, depending on how the bond is priced. Unlike
AS OF MARCH 11, 1998 Estimated Current Return, Estimated Long Term
Return takes into account maturities, discounts
and premiums of the underlying bonds.
No return estimate can be predictive of your
actual return because returns will vary with
purchase price (including sales charges), how long
units are held, changes in Portfolio composition,
changes in interest income and changes in fees and
expenses. Therefore, Estimated Current Return and
Estimated Long Term Return are designed to be
comparative rather than predictive. A yield
calculation which is more comparable to an
individual bond may be higher or lower than
Estimated Current Return or Estimated Long Term
Return which are more comparable to return
calculations used by other investment products.

-------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
SPONSORS: OF THIS DOCUMENT. ANY REPRESENTATION TO THE
Merrill Lynch, CONTRARY IS A CRIMINAL OFFENSE.
Pierce, Fenner & Smith Inquiries should be directed to the Trustee at
Incorporated 1-800-323-1508.
Smith Barney Inc. Prospectus dated March 12, 1998.
Dean Witter Reynolds Inc. INVESTORS SHOULD READ THIS PROSPECTUS CAREFULLY
PaineWebber Incorporated AND RETAIN IT FOR FUTURE REFERENCE.

<PAGE>
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Defined Asset FundsSM
Defined Asset Funds is America's oldest and largest family of unit investment
trusts, with over $115 billion sponsored in the last 25 years. Each Defined
Asset Fund is a portfolio of preselected securities. The portfolio is divided
into 'units' representing equal shares of the underlying assets. Each unit
receives an equal share of income and principal distributions.

Defined Asset Funds offer several defined 'distinctives'. You know in advance
what you are investing in and that changes in the portfolio are limited - a
defined portfolio. Most defined bond funds pay interest monthly - defined
income. The portfolio offers a convenient and simple way to invest - simplicity
defined.

Your financial professional can help you select a Defined Asset Fund to meet
your personal investment objectives. Our size and market presence enable us to
offer a wide variety of investments. The Defined Asset Funds family offers:
o Municipal bond portfolios
o Corporate bond portfolios
o Government bond portfolios
o Equity portfolios
o International bond and equity portfolios
The terms of Defined Funds are as short as one year or as long as 30 years.
Special defined bond funds are available including: insured funds, double and
triple tax-free funds and funds with 'laddered maturities' to help protect
against changing interest rates. Defined Asset Funds are offered by prospectus
only.
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Defined Monthly Payment Series
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Our defined portfolio of municipal bonds offers you a simple and convenient way
to earn federally tax-free monthly income. And by purchasing Defined Asset
Funds, you not only receive professional selection but also gain the advantage
of reduced risk by investing in bonds of several different issuers.

INVESTMENT OBJECTIVE

To provide interest income exempt from federal income taxes through investment
in a fixed portfolio consisting primarily of long-term municipal bonds issued by
or on behalf of states and their local governments and authorities.

DIVERSIFICATION

The Portfolio is diversified among 15 bond issues. Spreading your investment
among different issuers reduces your risk, but does not eliminate it. Because of
maturities, sales or other dispositions of bonds, the size, composition and
return of the Portfolio will change over time.

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Defining Your Portfolio
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PROFESSIONAL SELECTION AND SUPERVISION
The Portfolio contains a variety of bonds selected by experienced buyers. The
Fund is not actively managed; however, it is regularly reviewed and a bond can
be sold if retaining it is considered detrimental to investors' interests.

TYPES OF BONDS
The Portfolio consists of $10,415,000 face amount of municipal bonds of the
following types:
APPROXIMATE
PORTFOLIO
PERCENTAGE

/ / Hospitals/Nursing Homes/
Mental Health Facilities 38%
/ / Housing 14%
/ / Lease Rental Appropriation 18%
/ / Municipal Water/Sewer Utility 8%
/ / Miscellaneous 8%
/ / Universities/Colleges 14%

BOND QUALITY

Each bond included in the Portfolio is rated A or better by a nationally
recognized rating organization or, in the opinion of the Agent for the Sponsors,
has comparable credit characteristics. Each bond has been selected by investment
professionals from among available bonds of equivalent quality. In addition,
approximately 30% of the bonds are insured. This insurance guarantees the timely
payment of principal and interest on the bonds but does not guarantee the value
of the bonds or the Fund Units. (See Bonds Backed by Letters of Credit or
Insurance in Part B.)

BOND CALL FEATURES

It is possible that during periods of falling interest rates, a bond with a
coupon higher than current market rates will be prepaid or 'called', at the
option of the bond issuer, before its expected maturity. When bonds are
initially callable, the price is usually at a premium to par which then declines
to par over time. Bonds may also be subject to a mandatory sinking fund or have
extraordinary redemption provisions. For example, if the bond's proceeds are not
able to be used as intended the bond may be redeemed. This redemption and the
sinking fund are often at par.

CALL PROTECTION

Although many bonds are subject to optional refunding or call provisions, we
have selected bonds with call protection. This call protection means that any
bond in the Portfolio generally cannot be called for a number of years and
thereafter at a declining premium over par.
A-2
<PAGE>
TAX INFORMATION

Based on the opinion of bond counsel, interest income from the bonds held by
this Fund is 100% exempt under existing laws from regular federal income tax.
Any gain on a disposition of the underlying bonds or units will be subject to
tax. If you hold your units for more than 18 months you may be entitled to the
new 20% maximum federal tax rate for gains from the sale of your units. (See
Taxes in Part B.)
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Defining Your Investment
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PUBLIC OFFERING PRICE PER UNIT $1,028.76

The Public Offering Price as of March 11, 1998, the business day prior to the
Initial Date of Deposit, is based on the aggregate offer side value of the
underlying bonds in the Fund ($10,290,126.85) plus cash ($88,000.00), divided by
the number of units (10,088). The Public Offering Price on any subsequent date
will vary. An amount equal to principal cash, if any, as well as net accrued but
undistributed interest on the unit is added to the Public Offering Price. The
underlying bonds are evaluated by an independent evaluator at 3:30 p.m. Eastern
time on every business day thereafter.

PAR VALUE

The par value represented by each unit--the amount of money you will receive by
termination of the Fund, assuming all the bonds are paid at maturity or are
redeemed by the issuer at par or sold by the Fund at par--is $1,000.

LOW MINIMUM INVESTMENT

You can get started with a minimum purchase of about $1,000.

REINVESTMENT OPTION

You can elect to automatically reinvest your distributions into a separate
portfolio of federally tax-exempt bonds. Reinvesting helps to compound your
income tax-free.

PRINCIPAL DISTRIBUTIONS

Principal from sales, redemptions and maturities of bonds in the Fund will be
distributed to investors periodically when the amount to be distributed is more
than $5.00 per unit.

TERMINATION DATE

The Fund will generally terminate following the maturity date of the last
maturing bond listed in the Portfolio. The Fund may be terminated earlier if the
value is less than 40% of the face amount of bonds deposited.

SPONSORS' PROFIT OR LOSS

The Sponsors' profit or loss associated with the Fund will include the receipt
of applicable sales charges, any fees for underwriting or placing bonds,
fluctuations in the Public Offering Price or secondary market price of units and
a gain of $99,101.80 on the deposit of the bonds (see Underwriters' and
Sponsors' Profits in Part B).

UNDERWRITING ACCOUNT

One or more of the Sponsors has participated as sole underwriter, managing
underwriter or member of an underwriting syndicate from which approximately 11%
of the bonds in the Portfolio were acquired.

SPONSORS

MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
P.O. Box 9051,
Princeton, NJ 08543-9051 62.33%

SMITH BARNEY INC.
388 Greenwich Street--23rd Floor,
New York, NY 10013 9.91%

DEAN WITTER REYNOLDS INC.
Two World Trade Center--59th Floor,
New York, NY 10048 7.93%
PAINEWEBBER INCORPORATED
1285 Avenue of the Americas,
New York, NY 10019 19.83%

100.00%

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TAX-FREE VS. TAXABLE INCOME: A COMPARISON OF TAXABLE AND TAX-FREE YIELDS

TAXABLE INCOME 1998* EFFECTIVE % TAX-FREE YIELD OF
SINGLE RETURN JOINT RETURN TAX BRACKET 3% 3.5% 4% 4.5% 5% 5.5%
IS EQUIVALENT TO A TAXABLE YIELD OF
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<S> <C> <C> <C> <C> <C> <C> <C> <C>

0- 25,350 $ 0- 42,350 15.00 3.53 4.12 4.71 5.29 5.88 6.47
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$ 25,350- 61,400 $ 42,350-102,300 28.00 4.17 4.86 5.56 6.25 6.94 7.64
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$ 61,400-128,100 $102,300-155,950 31.00 4.35 5.07 5.80 6.52 7.25 7.97
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$128,100-278,450 $155,950-278,450 36.00 4.69 5.47 6.25 7.03 7.81 8.59
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OVER $278,450 OVER $278,450 39.60 4.97 5.79 6.62 7.45 8.28 9.11
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TAXABLE INCOME 199
SINGLE RETURN 6%

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<S> <C>
0- 25,350 7.06
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$ 25,350- 61,400 8.33
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$ 61,400-128,100 8.70
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$128,100-278,450 9.38
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OVER $278,450 9.93
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</TABLE>

To compare the yield of a taxable security with the yield of a federally
tax-free security, find your taxable income and read across. The table
incorporates 1998 federal income tax rates and assumes that all income would
otherwise be taxed at the investor's highest tax rate. Yield figures are for
example only.

*Based upon net amount subject to federal income tax after deductions and
exemptions. This table does not reflect the possible effect of other tax
factors, such as alternative minimum tax, personal exemptions, the phase out of
exemptions, itemized deductions, the possible partial disallowance of deductions
or state and local taxation. Consequently, investors are urged to consult their
own tax advisers in this regard.

A-3
<PAGE>
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Defined Portfolio
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Municipal Investment Trust Fund
Monthly Payment Series--612 March 12, 1998

OPTIONAL SINKING
RATING REFUNDING FUND COST
PORTFOLIO TITLE OF ISSUES (1) REDEMPTIONS (2) REDEMPTIONS (2) TO FUND (3)
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<S> <C> <C> <C> <C>

1. $415,000 School Bd. of
Hillsborough Cnty., FL, Cert. of
Part. (Master Lease Prog.), Series
1998 (MBIA Ins.), 3.60% to 5.00%,
7/1/99 through 7/1/01 (4) (5) AAA -- -- $ 418,036.85
2. $750,000 Illinois Hlth. Fac.
Auth., Rev. Rfdg. Bonds (Covenant
Retirement Cmnty., Inc.), Ser.
1998, 5.125%, 12/1/15 A- 12/1/07 @ 102 12/1/13 739,207.50
3. $500,000 Illinois Hlth. Fac.
Auth., Rev. Bonds (Friendship
Village of Schaumburg), Ser. 1997
A, 5.25%, 12/1/18 A- 12/1/07 @ 102 12/1/09 496,835.00
4. $750,000 Illinois Hlth. Facs.
Auth., Rev. Bonds (Victory Hlth.
Services), Series 1997 A, 5.75%,
8/15/27 A- 8/15/07 @ 101 8/15/17 776,737.50
5. $750,000 Indiana Hlth. Fac. Fin.
Auth., Hosp. Rev. Rfdg. Bonds
(Jackson Cnty. Schneck Mem. Hosp.
Proj.), Ser. 1998, 5.25%, 2/15/22
(4) A-(f) 2/15/08 @ 102 2/15/18 739,912.50
6. $500,000 Hospital Auth. of St.
Joseph Cnty., IN, Hlth. Sys. Bonds
(Memorial Hlth. Sys.), Ser. 1998 A
(MBIA Ins.), 4.625%, 8/15/28 AAA 2/15/08 @ 101 8/15/19 456,285.00
7. $750,000 School City of
Mishawaka Multi-School Bldg. Corp.
(St. Joseph Cnty., IN), First Mtge.
Bonds, Ser. 1998, 5.625%, 1/15/23 A 1/15/08 @ 102 1/15/19 774,510.00
8. $750,000 Massachusetts Hsg. Fin.
Agy., Hsg. Dev. Bonds, Ser. 1998 B
(MBIA Ins.), 5.40%, 12/1/28 AAA 6/1/08 @ 101 6/1/18 753,262.50

</TABLE>

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(1) All ratings are by Standard & Poor's Ratings Group unless followed by
'(m)', which indicates a Moody's Investors Service rating, by '(f)', which
indicates a Fitch Investors Service rating or by '+', which indicates that,
while the bond is unrated, in the opinion of the Agent for the Sponsors, the
bond has comparable credit characteristics to bonds rated A or better. Moody's
and Fitch ratings have been furnished by the Evaluator but not confirmed with
Moody's or Fitch. (See Appendix A to Part B.)
(2) Bonds are first subject to optional redemptions (which may be exercised in
whole or in part) on the dates and at the prices indicated under the Optional
Refunding Redemptions column. In subsequent years, bonds are redeemable at
declining prices, but typically not below par value. Some issues may be subject
to sinking fund redemption or extraordinary redemption without premium prior to
the dates shown.
(3) Evaluation of the bonds by the Evaluator is made on the basis of current
offer side evaluation. On this basis, approximately 45% of the bonds were
deposited at a premium and 55% at a discount from par.

A-4
<PAGE>
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Defined Portfolio
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Municipal Investment Trust Fund
Monthly Payment Series--612 (Continued) March 12, 1998

9. $750,000 Massachusetts Wtr.
Resources Auth., Gen. Rev. Bonds,
Ser. 1995 B (MBIA Ins.), 4.00%,
12/1/18 AAA 12/1/05 @ 100 12/1/17 $ 649,485.00
10. $750,000 Michigan Higher Educ.
Fac. Auth., Ltd. Oblig. Rev. Bonds
(Calvin Coll. Proj.), Ser. 1998,
5.55%, 6/1/17 (4) + 6/1/08 @ 101 6/1/14 759,307.50
11. $750,000 Crow Fin. Auth., MT,
Tribal Purpose Rev. Bonds, Ser.
1997 A, 5.65%, 10/1/17 A 10/1/07 @ 102 10/1/08 775,717.50
12. $750,000 New Hampshire Higher
Educ. and Hlth. Fac. Auth., Rev.
Bonds, Franklin Pierce Coll. Issue,
Ser. 1998 (ACA Ins.), 5.30%,
10/1/28 A 4/1/08 @ 102 10/1/19 738,810.00
13. $750,000 New Jersey Hlth. Care
Fac. Fin. Auth., Rev. Bonds, Cap.
Hlth. Sys. Oblig. Grp. Issue, Ser.
1997, 5.25%, 7/1/27 A- 7/1/08 @ 101 7/1/18 738,900.00
14. $750,000 New York State Urban
Dev. Corp., Correctional Facs. Svc.
Contract, Rev. Bonds, Ser. A,
5.00%, 1/1/28 A(f) 1/1/08 @ 102 1/1/19 716,415.00
15. $750,000 Virginia Hsg. Dev.
Auth., Multi-Family Hsg. Bonds,
Ser. 1998 E, 5.60%, 11/1/18 (4) AA+ 11/1/08 @ 102 11/1/14 756,705.00
--------------------
$ 10,290,126.85
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--------------------
</TABLE>

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(4) These bonds are when-issued bonds that are expected to settle 7 to 190 days
after the settlement date for Units. The Trustee's fees and expenses will be
reduced during the first year by $0.73 per Unit and during the second year by
$1.57 per Unit to compensate for interest that would have been accrued on the
bonds between the settlement date for Units and the actual date of delivery of
the bonds. (See Income, Distributions and Reinvestment--Income in Part B.)
(5) It is anticipated that interest and principal received from these bonds
will be applied to the payment of the Fund's deferred sales charge and,
therefore, these amounts have not been included in the Fund's calculation of
Estimated Current and Long Term Returns.

A-5
<PAGE>
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Defining Your Costs
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SALES CHARGES

The Fund does not have an up-front sales charge in the initial offering period
until the deduction of the first deferred sales charge installment from holders
of record on August 10, 1998. In the first three years of owning your units you
will pay a deferred sales charge of $15 per unit each year ($3.75 quarterly
August, November, February and May), a total of $45.00. This deferred sales
charge will be paid from interest on the short-term bonds in the Portfolio and
proceeds from the periodic sale or maturity of those bonds. Interest on these
short-term bonds is not included in the Fund's return figures. Units purchased
after the deduction of the first deferred sales charge installment will be
charged an up-front sales charge equal to 0.375% per unit based on the Public
Offering Price (less the value of the short-term bonds reserved to pay the
deferred sales charge not yet accrued) multiplied by the number of deferred
sales charge payments already deducted. (See How to Buy Units in Part B.)

Although the Fund is a unit investment trust rather than a mutual fund, the
following information is presented to permit a comparison of fees and an
understanding of the direct or indirect costs and expenses that you pay.

As a %
of Initial Offer-
ing Amount per
Period Public $1,000
Offering Price Invested
----------------- --------------
Maximum Sales Charges 4.50% $ 45.00

The Fund (and therefore the investors) will bear all or a portion of its
organizational costs--including costs of preparing the registration statement,
the trust indenture and other closing documents, registering units with the SEC
and the states and the initial audit of the Portfolio--as is common for mutual
funds.

ESTIMATED ANNUAL FUND OPERATING EXPENSES

As a %
of Average
Net Assets* Per Unit
----------------- --------------
Trustee's Fee .070% $ 0.72
Portfolio Supervision,
Bookkeeping and Administrative
Fees .045% $ 0.46
Evaluator's Fee .013% $ 0.13
Organizational Costs .019% $ 0.20
Other Operating Expenses .037% $ 0.38
----------------- --------------
TOTAL .184% $ 1.89

- ------------
* Based on the mean of the bid and offer side evaluations.

COSTS OVER TIME

You would pay the following cumulative expenses on a $1,000 investment, assuming
a 5% annual return on the investment throughout the indicated periods and
redemption at the end of the period:

1 Year 3 Years 5 Years 10 Years
$47 $51 $55 $68

No redemption at the end of the period:

1 Year 3 Years 5 Years 10 Years
$17 $51 $55 $68

The example assumes reinvestment of all distributions into additional units of
the Fund (a reinvestment option different from that offered by this Fund) and
uses a 5% annual rate of return as mandated by Securities and Exchange
Commission regulations applicable to mutual funds. The Costs Over Time above
reflect both sales charges and operating expenses on an increasing investment
(because the net annual return is reinvested). The example should not be
considered a representation of past or future expenses or annual rate of return;
the actual expenses and annual rate of return may be more or less than the
example.

REDEEMING OR SELLING YOUR INVESTMENT

You may redeem or sell your units at any time. Your price is based on the Fund's
then current net asset value (based on the offer side evaluation of the bonds
during the initial public offering period and for at least the first three
months of the Fund and on the lower, bid side evaluation thereafter, as
determined by an independent evaluator) plus principal cash, if any, as well as
accrued interest. The redemption and Sponsors' repurchase price as of March 11,
1998, was $45.00 less than the Public Offering Price, reflecting the deduction
of the deferred sales charge, which declines by $3.75 quarterly over
approximately the first three years of the Fund. If you redeem or sell your
Units before the final deferred sales charge installment deduction, you will pay
the remaining balance of the deferred sales charge. (See How to Buy Units in
Part B.)

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Defining Your Income
- ----------------------------------------------------------------

MONTHLY FEDERALLY TAX-FREE INTEREST INCOME

The Fund pays monthly income, even though the bonds generally pay interest
semi-annually.

WHAT YOU MAY EXPECT
(PAYABLE ON THE 25TH DAY OF THE MONTH TO HOLDERS OF RECORD ON THE 10TH DAY OF
THE MONTH):

First Distribution per unit
(April 25, 1998): $ 3.90
Regular Monthly Income per unit
(Beginning on May 25, 1998): $ 4.18
Annual Income per unit: $ 50.21

These figures are estimates determined as of the business day prior to the
Initial Date of Deposit and actual payments may vary.

Estimated cash flows are available upon request from the Sponsors.
- ----------------------------------------------------------------
Defining Your Risks
- ----------------------------------------------------------------

RISK FACTORS

Unit price fluctuates and could be adversely affected by increasing interest
rates as well as the financial condition of the issuers of the bonds. Because of
the possible maturity, sale or other disposition of securities, the size,
composition and return of the portfolio may change at any time. Because of the
sales charges, returns of principal and fluctuations in unit price, among other
reasons, the sale price will generally be less than the cost of your units. Unit
prices could also be adversely affected if a limited trading market exists in
any security to be sold. There is no guarantee that the Fund will achieve its
investment objective.

The Fund is concentrated in Hospital/Nursing Home/Mental Health Facility bonds
and is therefore dependent to a significant degree on revenues generated from
those particular activities (see Risk Factors in Part B).

A-6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

The Sponsors, Trustee and Holders of Municipal Investment Trust Fund, Monthly
Payment Series--612, Defined Asset Funds (the 'Fund'):

We have audited the accompanying statement of condition and the related defined
portfolio included in the prospectus of the Fund as of March 12, 1998. This
financial statement is the responsibility of the Trustee. Our responsibility is
to express an opinion on this financial statement based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. Our procedures included
confirmation of cash, securities and an irrevocable letter of credit deposited
for the purchase of securities, as described in the statement of condition, with
the Trustee. An audit also includes assessing the accounting principles used and
significant estimates made by the Trustee, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of the Fund as of March 12, 1998
in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP
NEW YORK, N.Y.
MARCH 12, 1998

STATEMENT OF CONDITION AS OF MARCH 12, 1998

TRUST PROPERTY

Investments--Bonds and Contracts to purchase Bonds(1) $ 10,290,126.85
Cash 88,000.00
Accrued interest to Initial Date of Deposit on underlying
Bonds 70,752.86
Organizational costs (2) 10,088.00
--------------------
Total $ 10,458,967.71
--------------------
--------------------
LIABILITIES AND INTEREST OF HOLDERS
Liabilities: Advance by Trustee for accrued interest (3) $ 70,752.86
Accrued Liability(2) 10,088.00
--------------------
Subtotal 80,840.86
--------------------
Interest of Holders of 10,088 Units of fractional
undivided interest outstanding:
Cost to investors(4)(5) 10,378,126.85
--------------------
Total $ 10,458,967.71
--------------------
--------------------

- ---------------

(1) Aggregate cost to the Fund of the bonds listed under Defined
Portfolio is based upon the offer side evaluation determined by the Evaluator at
the evaluation time on the business day prior to the Initial Date of Deposit.
The contracts to purchase the bonds are collateralized by an irrevocable letter
of credit which has been issued by DBS Bank, New York Branch, in the amount of
$7,289,161.40 and deposited with the Trustee. The amount of the letter of credit
includes $7,270,611.05 for the purchase of $7,415,000.00 face amount of the
bonds, plus $18,550.35 for accrued interest.
(2) This represents a portion of the Fund's organizational costs which
will be deferred and amortized over five years.
(3) Representing a special distribution to the Sponsors by the Trustee
of an amount equal to the accrued interest on the bonds.
(4) A mandatory distribution of $3.75 per Unit is payable quarterly
August, November, February and May, up to an aggregate of $45.00 per Unit over
approximately a three-year period. Distributions will be made to an account
maintained by the Trustee from which the deferred sales charge obligation of the
investors to the Sponsors will be satisfied. If units are redeemed prior to the
end of the third year of the Fund, the remaining portion of the distribution
applicable to such Units will be transferred to such account on the redemption
date.
(5) Aggregate public offering price (exclusive of interest) computed
on the basis of the offer side evaluation of the underlying bonds as of the
evaluation time on the business day prior to the Initial Date of Deposit.

A-7
<PAGE>
MUNICIPAL INVESTMENT TRUST FUND
MONTHLY PAYMENT SERIES
DEFINED ASSET FUNDS

I want to learn more about automatic reinvestment in the Investment Accumulation
Program. Please send me information about participation in the Municipal Fund
Accumulation Program, Inc. and a current Prospectus.

My name (please print) _________________________________________________________

My address (please print):
Street and Apt. No. ____________________________________________________________

City, State, Zip Code __________________________________________________________

This page is a self-mailer. Please complete the information above, cut along the
dotted line, fold along the lines on the reverse side, tape, and mail with the
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A-8
<PAGE>

BUSINESS REPLY MAIL NO POSTAGE
FIRST CLASS PERMIT NO. 644 NEW YORK, NY NECESSARY
IF MAILED
POSTAGE WILL BE PAID BY ADDRESSEE IN THE
THE CHASE MANHATTAN BANK (MITF) UNITED STATES
RETAIL PROCESSING DEPARTMENT
BOWLING GREEN STATION
P.O. BOX 5179
NEW YORK, NY 10274-5179

- --------------------------------------------------------------------------------
(Fold along this line.)

- --------------------------------------------------------------------------------
(Fold along this line.)
<PAGE>
DEFINED ASSET FUNDSSM
PROSPECTUS--PART B
MUNICIPAL INVESTMENT TRUST FUND
FURTHER DETAIL REGARDING ANY OF THE INFORMATION PROVIDED IN THE PROSPECTUS MAY
BE OBTAINED
WITHIN FIVE DAYS BY WRITING OR CALLING THE TRUSTEE, THE ADDRESS AND
TELEPHONE NUMBER OF WHICH ARE SET FORTH ON THE BACK COVER OF PART A OF THIS
PROSPECTUS.

Index

PAGE
---------
Fund Description...................................... 1
Risk Factors.......................................... 2
How to Buy Units...................................... 8
How to Redeem or Sell Units........................... 10
Income, Distributions and Reinvestment................ 11
Fund Expenses......................................... 12
Taxes................................................. 12
PAGE
---------
Records and Reports................................... 13
Trust Indenture....................................... 14
Miscellaneous......................................... 14
Exchange Option....................................... 16
Supplemental Information.............................. 17
Appendix A--Description of Ratings.................... a-1
Appendix B--Secondary Market Sales Charge Schedule.... b-1

FUND DESCRIPTION

BOND PORTFOLIO SELECTION

Professional buyers for Defined Asset Funds, with access to extensive
research, selected the Bonds for the Portfolio after considering the Fund's
investment objective as well as the quality of the Bonds (all Bonds in the
Portfolio are initially rated in the category A or better by at least one
nationally recognized rating organization or have comparable credit
characteristics), the yield and price of the Bonds compared to similar
securities, the maturities of the Bonds and the diversification of the
Portfolio. Only issues meeting these stringent criteria of Defined Asset Funds
are included in the Portfolio. No leverage or borrowing is used nor does the
Portfolio contain other kinds of securities to enhance yield. A summary of the
Bonds in the Portfolio appears in Part A of the Prospectus. In a Fund that
includes multiple Trusts or Portfolios, the word Fund should be understood to
mean each individual Trust or Portfolio.

The deposit of the Bonds in the Fund on the initial date of deposit
established a proportionate relationship among the face amounts of the Bonds.
During the 90-day period following the initial date of deposit the Sponsors may
deposit additional Bonds in order to create new Units, maintaining to the extent
practicable that original proportionate relationship. Deposits of additional
Bonds subsequent to the 90-day period must generally replicate exactly the
proportionate relationship among the face amounts of the Bonds at the end of the
initial 90-day period.

Yields on bonds depend on many factors including general conditions of the
bond markets, the size of a particular offering and the maturity and quality
rating of the particular issues. Yields can vary among bonds with similar
maturities, coupons and ratings. Ratings represent opinions of the rating
organizations as to the quality of the bonds rated, based on the credit of the
issuer or any guarantor, insurer or other credit provider, but these ratings are
only general standards of quality (see Appendix A).

After the initial date of deposit, the ratings of some Bonds may be reduced
or withdrawn, or the credit characteristics of the Bonds may no longer be
comparable to bonds rated A or better. Bonds rated BBB or Baa (the lowest
investment grade rating) or lower may have speculative characteristics, and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than is the case
with higher grade bonds. Bonds rated below investment grade or unrated bonds
with similar credit characteristics are often subject to greater market
fluctuations and risk of loss of principal and income than higher grade bonds
and their value may decline precipitously in response to rising interest rates.

1
<PAGE>
Because each Defined Asset Fund is a preselected portfolio of bonds, you
know the securities, maturities, call dates and ratings before you invest. Of
course, the Portfolio will change somewhat over time, as Bonds mature, are
redeemed or are sold to meet Unit redemptions or in other limited circumstances.
Because the Portfolio is not actively managed and principal is returned as the
Bonds are disposed of, this principal should be relatively unaffected by changes
in interest rates.

BOND PORTFOLIO SUPERVISION

The Fund follows a buy and hold investment strategy in contrast to the
frequent portfolio changes of a managed fund based on economic, financial and
market analyses. The Fund may retain an issuer's bonds despite adverse financial
developments. Experienced financial analysts regularly review the Portfolio and
a Bond may be sold in certain circumstances including the occurrence of a
default in payment or other default on the Bond, a decline in the projected
income pledged for debt service on a revenue bond, institution of certain legal
proceedings, if the Bond becomes taxable or is otherwise inconsistent with the
Fund's investment objectives, a decline in the price of the Bond or the
occurrence of other market or credit factors (including advance refundings)
that, in the opinion of the Sponsors makes retention of the Bond detrimental to
the interests of investors. The Trustee must generally reject any offer by an
issuer of a Bond to exchange another security pursuant to a refunding or
refinancing plan.

Every investment involves some risk; for example, the market prices of most
fixed-income investments decline when interest rates rise, and this exposure
increases with the remaining life of the investment. Historically, however,
municipal bonds generally have been second only in creditworthiness to U.S.
government obligations. Municipal unit trusts can be an efficient alternative to
investing in actively managed funds. Active management of a portfolio of quality
municipal bonds may not be as important as with other securities. Insured bonds
provide additional assurance of prompt payments of interest and principal (but
not stability of market value).

The Sponsors and the Trustee are not liable for any default or defect in a
Bond. If a contract to purchase any Bond fails within the 90-day period
following the initial date of deposit, the Sponsors may generally deposit a
replacement bond so long as it is a tax-exempt bond that is not a 'when, as and
if issued' bond, has a fixed maturity or disposition date substantially similar
to the failed Bond and has a rating at least equal to that of the Bond it
replaces (or, if not rated, has comparable credit characteristics). A
replacement bond must be deposited within 110 days after the initial date of
deposit, at a cost that does not exceed the funds reserved for purchasing the
failed Bond and at a yield to maturity and current return substantially
equivalent (considering then current market conditions and relative
creditworthiness) to those of the failed Bond, as of the date the failed
contract was deposited.

RISK FACTORS

An investment in the Fund entails certain risks, including the risk that
the value of your investment will decline with increases in interest rates.
Generally speaking, bonds with longer maturities will fluctuate in value more
than bonds with shorter maturities. In recent years there have been wide
fluctuations in interest rates and in the value of fixed-rate bonds generally.
The Sponsors cannot predict the direction or scope of any future fluctuations.

Certain of the Bonds may have been deposited at a market discount or
premium principally because their interest rates are lower or higher than
prevailing rates on comparable debt securities. The current returns of market
discount bonds are lower than comparably rated bonds selling at par because
discount bonds tend to increase in market value as they approach maturity. The
current returns of market premium bonds are higher than comparably rated bonds
selling at par because premium bonds tend to decrease in market value as they
approach maturity. Because part of the purchase price is returned through
current income payments and not at maturity, an early redemption at par of a
premium bond will result in a reduction in yield to the Fund. Market premium or
discount attributable to interest rate changes does not indicate market
confidence or lack of confidence in the issue.

Certain Bonds deposited into the Fund may have been acquired on a
when-issued or delayed delivery basis. The purchase price for these Bonds is
determined prior to their delivery to the Fund and a gain or loss may result
from fluctuations in the value of the Bonds. Additionally, if the value of the
short-term Bonds intended for payment of the periodic deferred sales charge,
together with the interest thereon, were to become insufficient to pay these
charges, additional bonds would be required to be sold.

The Fund may be concentrated in one or more of types of bonds.
Concentration in a State may involve additional risk because of the decreased
diversification of economic, political, financial and market risks. Set forth
below is a

2
<PAGE>
brief description of certain risks associated with bonds which may be held by
the Fund. Additional information is contained in the Information Supplement
which is available from the Trustee at no charge to the investor.

GENERAL OBLIGATION BONDS

Certain of the Bonds may be general obligations of a governmental entity.
General obligation bonds are backed by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. However, the
taxing power of any governmental entity may be limited by provisions of state
constitutions or laws and its credit will depend on many factors, including an
erosion of the tax base resulting from population declines, natural disasters,
declines in the state's industrial base or an inability to attract new
industries, economic limits on the ability to tax without eroding the tax base
and the extent to which the entity relies on federal or state aid, access to
capital markets or other factors beyond the entity's control. In addition,
political restrictions on the ability to tax and budgetary constraints affecting
state governmental aid may have an adverse impact on the creditworthiness of
cities, counties, school districts and other local governmental units. Recent
and significant changes in Federal welfare policy may have substantial negative
impact on certain states, and localities within those states, making their
ability to maintain balanced finances more difficult in the future.

MORAL OBLIGATION BONDS

The Portfolio may include 'moral obligation' bonds. If an issuer of moral
obligation bonds is unable to meet its obligations, the repayment of the bonds
becomes a moral commitment but not a legal obligation of the state or local
government in question. Even though the state or local government may be called
on to restore any deficits in capital reserve funds of the agencies or
authorities which issued the bonds, any restoration generally requires
appropriation by the state or local legislature and does not constitute a
legally enforceable obligation or debt of the state or local government. The
agencies or authorities generally have no taxing power.

REFUNDED BONDS

Refunded bonds are typically secured by direct obligations of the U.S.
Government or in some cases obligations guaranteed by the U.S. Government placed
in an escrow account maintained by an independent trustee until maturity or a
predetermined redemption date. These obligations are generally noncallable prior
to maturity or the predetermined redemption date. In a few isolated instances,
however, bonds which were thought to be escrowed to maturity have been called
for redemption prior to maturity.

MUNICIPAL REVENUE BONDS

Municipal revenue bonds are tax-exempt securities issued by states,
municipalities, public authorities or similar entities to finance the cost of
acquiring, constructing or improving various projects. Municipal revenue bonds
are not general obligations of governmental entities backed by their taxing
power and payment is generally solely dependent upon revenues of the project,
excise taxes or state appropriations. Examples of municipal revenue bonds are:

Municipal utility bonds, including electrical, water and sewer revenue
bonds, whose payments are dependent on various factors, including the rates
the utilities may charge, the demand for their services and their operating
costs, including expenses to comply with environmental legislation and
other energy and licensing laws and regulations. Utilities are particularly
sensitive to, among other things, the effects of inflation on operating and
construction costs, the unpredictability of future usage requirements, the
costs and availability of fuel and, with certain electric utilities, the
risks associated with the nuclear industry. The movement to introduce
competition in the investor-owned electric utility industry is likely to
indirectly affect municipal utility systems by inducing them to maintain
rates as low as possible. In this effort to keep rates low, municipal
utilities may have more trouble raising rates to completely recover
investment in generating plant;

Lease rental bonds which are generally issued by governmental financing
authorities with no direct taxing power for the purchase of equipment or
construction of buildings that will be used by a state or local government.
Lease rental bonds are generally subject to an annual risk that the lessee
government might not appropriate funds for the leasing rental payments to
service the bonds and may also be subject to the risk that rental
obligations may terminate in the event of damage to or destruction or
condemnation of the equipment or building;

Multi-family housing revenue bonds and single family mortgage revenue
bonds which are issued to provide financing for various housing projects
and which are payable primarily from the revenues derived from mortgage

3
<PAGE>
loans to housing projects for low to moderate income families or notes
secured by mortgages on residences; repayment of this type of bond is
therefore dependent upon, among other things, occupancy levels, rental
income, the rate of default on underlying mortgage loans, the ability of
mortgage insurers to pay claims, the continued availability of federal,
state or local housing subsidy programs, economic conditions in local
markets, construction costs, taxes, utility costs and other operating
expenses and the managerial ability of project managers. Housing bonds are
generally prepayable at any time and therefore their average life will
ordinarily be less than their stated maturities;

Hospital, mental health and nursing home facility bonds whose payments
are dependent upon revenues of hospitals and other health care providers.
These revenues come from private third-party payors and government
programs, including the Medicare and Medicaid programs, which have
generally undertaken cost containment measures to limit payments to health
care providers. Hospitals must also deal with shifting competition
resulting from hospital mergers and affiliations and the need to reduce
costs as HMOs increase market penetration. Nursing homes need to keep
residential facilities for the elderly, which are not reimbursable from
Medicare/Medicaid, on a profitable basis. Hospital supply and drug
companies must deal with their need to raise prices in an environment where
hospitals and other health care providers are under intense pressure to
keep their costs low. Hospitals and health care providers are subject to
various legal claims by patients and others and are adversely affected by
increasing costs of insurance;

Airport, port, highway and transit authority revenue bonds which are
dependent for payment on revenues from the financed projects, including
user fees from ports and airports, tolls on turnpikes and bridges, rents
from buildings, transit fare revenues and additional financial resources
including federal and state subsidies, lease rentals paid by state or local
governments or a pledge of a special tax such as a sales tax or a property
tax. In the case of the air travel industry, airport income is largely
affected by the airlines' ability to meet their obligations under use
agreements which in turn is affected by increased competition among
airlines, excess capacity and increased fuel costs, among other factors;

Solid waste disposal bonds which are generally payable from dumping and
user fees and from revenues that may be earned by the facility on the sale
of electrical energy generated in the combustion of waste products and
which are therefore dependent upon the ability of municipalities to fully
utilize the facilities, sufficient supply of waste for disposal, economic
or population growth, the level of construction and maintenance costs, the
existence of lower-cost alternative modes of waste processing and
increasing environmental regulation. A recent decision of the U.S. Supreme
Court limiting a municipality's ability to require use of its facilities
may have an adverse affect on the credit quality of various issues of these
bonds;

Special tax bonds which are not secured by general tax revenues but are
only payable from and secured by the revenues derived by a municipality
from a particular tax--for example, a tax on the rental of a hotel room, on
the purchase of food and beverages, on the rental of automobiles or on the
consumption of liquor and may therefore be adversely affected by a
reduction in revenues resulting from a decline in the local economy or
population or a decline in the consumption, use or cost of the goods and
services that are subject to taxation;

Student loan revenue bonds which are typically secured by pledges of new
or existing student loans. The loans, in turn, are generally either
guaranteed by eligible guarantors and reinsured by the Secretary of the
U.S. Department of Education, directly insured by the federal government,
or financed as part of supplemental or alternative loan programs within a
state (e.g., loan repayments are not guaranteed). These bonds often permit
the issuer to enter into interest rate swap agreements with eligible
counterparties in which event the bonds are subject to the additional risk
of the counterparty's ability to fulfill its swap obligation;

University and college bonds, the payments on which are dependent upon
various factors, including the size and diversity of their sources of
revenues, enrollment, reputation, the availability of endowments and other
funds and, in the case of public institutions, the financial condition of
the relevant state or other governmental entity and its policies with
respect to education; and

Tax increment and tax allocation bonds, which are secured by ad valorem
taxes imposed on the incremental increase of taxable assessed valuation of
property within a jurisdiction above an established base of assessed value.
The issuers of these bonds do not have general taxing authority and the tax
assessments on which the taxes used to service the bonds are based may be
subject to devaluation due to market price declines or governmental action.

4
<PAGE>
Puerto Rico. Certain Bonds may be affected by general economic conditions
in the Commonwealth of Puerto Rico. Puerto Rico's economy is largely dependent
for its development on federal programs, and current federal budgetary policies
suggest that an expansion of its programs is unlikely. Reductions in federal tax
benefits or incentives or curtailment of spending programs (such as the phased
repeal of the Puerto Rico and possession federal tax credit) could adversely
affect the Puerto Rican economy.

Industrial Development Revenue Bonds. Industrial development revenue bonds
are municipal obligations issued to finance various privately operated projects
including pollution control and manufacturing facilities. Payment is generally
solely dependent upon the creditworthiness of the corporate operator of the
project and, in certain cases, an affiliated or third party guarantor and may be
affected by economic factors relating to the particular industry as well as
varying degrees of governmental regulation. In many cases industrial revenue
bonds do not have the benefit of covenants which would prevent the corporations
from engaging in capital restructurings or borrowing transactions which could
reduce their ability to meet their obligations and result in a reduction in the
value of the Portfolio.

BONDS BACKED BY LETTERS OF CREDIT OR INSURANCE

Certain Bonds may be secured by letters of credit issued by commercial
banks or savings banks, savings and loan associations and similar thrift
institutions or are direct obligations of banks or thrifts. The letter of credit
may be drawn upon, and the Bonds redeemed, if an issuer fails to pay amounts due
on the Bonds or, in certain cases, if the interest on the Bond becomes taxable.
Letters of credit are irrevocable obligations of the issuing institutions. The
profitability of a financial institution is largely dependent upon the credit
quality of its loan portfolio which, in turn, is affected by the institution's
underwriting criteria, concentrations within the portfolio and specific industry
and general economic conditions. The operating performance of financial
institutions is also impacted by changes in interest rates, the availability and
cost of funds, the intensity of competition and the degree of governmental
regulation.

Certain Bonds may be insured or guaranteed by insurance companies listed
below. The claims-paying ability of each of these companies, unless otherwise
indicated, was rated AAA by Standard & Poor's or another nationally recognized
rating organization at the time the insured Bonds were purchased by the Fund.
The ratings are subject to change at any time at the discretion of the rating
agencies. In an Insured Series, in the event that the rating of an insurance
company insuring a bond is reduced, the Sponsors are authorized to direct the
Trustee to obtain other insurance on behalf of the Fund. The insurance policies
guarantee the timely payment of principal and interest on the Bonds but do not
guarantee their market value or the value of the Units. The insurance policies
generally do not provide for accelerated payments of principal, except at the
sole option of the insurer, or cover redemptions resulting from events of
taxability.

The following summary information relating to the listed insurance
companies has been obtained from publicly available information:

FINANCIAL INFORMATION
AS OF DECEMBER 31, 1996
(IN MILLIONS OF DOLLARS)
-------------------------------------
POLICYHOLDERS'
NAME DATE ESTABLISHED ADMITTED ASSETS SURPLUS
- ----------------------------------------------------- ----------------- --------------- --------------------
<S> <C> <C> <C>

AMBAC Indemnity Corporation.......................... 1970 $ 2,585 $ 899
American Capital Access (ACA) (A by S&P)............. 1997 * *
Asset Guaranty Insurance Co. (AA by S&P)............. 1988 204 87
Capital Markets Assurance Corp. (CAPMAC) 1987 321 194
Connie Lee Insurance Company......................... 1987 233 116
Financial Guaranty Insurance Company................. 1984 2,392 1,093
Financial Security Assurance Inc. (FSA) (including
Financial Security Assurance of Maryland Inc.
(FSAM) (formerly Capital Guaranty Insurance
Company)........................................... 1984 1,155 449
MBIA Insurance Corporation........................... 1986 4,189 1,467

</TABLE>
- ------------------------
* Startup company in 1997.

Insurance companies are subject to extensive regulation and supervision
where they do business by state insurance commissioners who regulate the
standards of solvency which must be maintained, the nature of and limitations on
investments, reports of financial condition, and requirements regarding reserves
for unearned premiums, losses and other matters. A significant portion of the
assets of insurance companies are required by law to be held in reserve against
potential claims on policies and is not available to general creditors. Although
the federal government does not regulate the business of insurance, federal
initiatives including pension regulation, controls on medical care costs,

5
<PAGE>
minimum standards for no-fault automobile insurance, national health insurance,
tax law changes affecting life insurance companies and repeal of the antitrust
exemption for the insurance business can significantly impact the insurance
business.

STATE RISK FACTORS

Investment in a single State Trust, as opposed to a Fund which invests in
the obligations of several states, may involve some additional risk due to the
decreased diversification of economic, political, financial and market risks. A
brief description of the factors which may affect the financial condition of the
applicable State for any State Trust, together with a summary of tax
considerations relating to that State, appear in Part A of the Prospectus;
further information is contained in the Information Supplement.

LITIGATION AND LEGISLATION

The Sponsors do not know of any pending litigation as of the initial date
of deposit which might reasonably be expected to have a material adverse effect
upon the Fund. At any time after the initial date of deposit, litigation may be
initiated on a variety of grounds, or legislation may be enacted, affecting the
Bonds in the Fund. Litigation, for example, challenging the issuance of
pollution control revenue bonds under environmental protection statutes may
affect the validity of certain Bonds or the tax-free nature of their interest.
While the outcome of litigation of this nature can never be entirely predicted,
opinions of bond counsel are delivered on the date of issuance of each Bond to
the effect that it has been validly issued and that the interest thereon is
exempt from federal income tax. From time to time, proposals are introduced in
Congress to, among other things, reduce federal income tax rates, impose a flat
tax, exempt investment income from tax or abolish the federal income tax and
replace it with another form of tax. Enactment of any such legislation could
adversely affect the value of the Units. The Fund, however, cannot predict what
legislation, if any, in respect of tax rates may be proposed, nor can it predict
which proposals, if any, might be enacted.

Also, certain proposals, in the form of state legislative proposals or
voter initiatives, seeking to limit real property taxes have been introduced in
various states, and an amendment to the constitution of the State of California,
providing for strict limitations on real property taxes, has had a significant
impact on the taxing powers of local governments and on the financial condition
of school districts and local governments in California. In addition, other
factors may arise from time to time which potentially may impair the ability of
issuers to make payments due on the Bonds. Under the Federal Bankruptcy Code,
for example, municipal bond issuers, as well as any underlying corporate
obligors or guarantors, may proceed to restructure or otherwise alter the terms
of their obligations.

From time to time Congress considers proposals to prospectively and
retroactively tax the interest on state and local obligations, such as the
Bonds. The Supreme Court clarified in South Carolina v. Baker (decided on April
20, 1988) that the U.S. Constitution does not prohibit Congress from passing a
nondiscriminatory tax on interest on state and local obligations. This type of
legislation, if enacted into law, could require investors to pay income tax on
interest from the Bonds and could adversely affect an investment in Units. See
Taxes.

PAYMENT OF THE BONDS AND LIFE OF THE FUND

The size and composition of the Portfolio will change over time. Most of
the Bonds are subject to redemption prior to their stated maturity dates
pursuant to optional refunding or sinking fund redemption provisions or
otherwise. In general, optional refunding redemption provisions are more likely
to be exercised when the value of a Bond is at a premium over par than when it
is at a discount from par. Some Bonds may be subject to sinking fund and
extraordinary redemption provisions which may commence early in the life of the
Fund. Additionally, the size and composition of the Fund will be affected by the
level of redemptions of Units that may occur from time to time. Principally,
this will depend upon the number of investors seeking to sell or redeem their
Units and whether or not the Sponsors are able to sell the Units acquired by
them in the secondary market. As a result, Units offered in the secondary market
may not represent the same face amount of Bonds as on the initial date of
deposit. Factors that the Sponsors will consider in determining whether or not
to sell Units acquired in the secondary market include the diversity of the
Portfolio, the size of the Fund relative to its original size, the ratio of Fund
expenses to income, the Fund's current and long-term returns, the degree to
which Units may be selling at a premium over par and the cost of maintaining a
current prospectus for the Fund. These factors may also lead the Sponsors to
seek to terminate the Fund earlier than its mandatory termination date.

6
<PAGE>
FUND TERMINATION

The Fund will be terminated no later than the mandatory termination date
specified in Part A of the Prospectus. It will terminate earlier upon the
disposition of the last Bond or upon the consent of investors holding 51% of the
Units. The Fund may also be terminated earlier by the Sponsors once the total
assets of the Fund have fallen below the minimum value specified in Part A of
the Prospectus. A decision by the Sponsors to terminate the Fund early will be
based on factors similar to those considered by the Sponsors in determining
whether to continue the sale of Units in the secondary market.

Notice of impending termination will be provided to investors and
thereafter units will no longer be redeemable. On or shortly before termination,
the Fund will seek to dispose of any Bonds remaining in the Portfolio although
any Bond unable to be sold at a reasonable price may continue to be held by the
Trustee in a liquidating trust pending its final disposition. A proportional
share of the expenses associated with termination, including brokerage costs in
disposing of Bonds, will be borne by investors remaining at that time. This may
have the effect of reducing the amount of proceeds those investors are to
receive in any final distribution.

LIQUIDITY

Up to 40% of the value of the Portfolio may be attributable to guarantees
or similar security provided by corporate entities. These guarantees or other
security may constitute restricted securities that cannot be sold publicly by
the Trustee without registration under the Securities Act of 1933, as amended.
The Sponsors nevertheless believe that, should a sale of the Bonds guaranteed or
secured be necessary in order to meet redemption of Units, the Trustee should be
able to consummate a sale with institutional investors.

The principal trading market for the Bonds will generally be in the
over-the-counter market and the existence of a liquid trading market for the
Bonds may depend on whether dealers will make a market in them. There can be no
assurance that a liquid trading market will exist for any of the Bonds,
especially since the Fund may be restricted under the Investment Company Act of
1940 from selling Bonds to any Sponsor. The value of the Portfolio will be
adversely affected if trading markets for the Bonds are limited or absent.

HOW TO BUY UNITS

Units are available from any of the Sponsors, Underwriters and other
broker-dealers at the Public Offering Price plus accrued interest on the Units.
The Public Offering Price varies each Business Day with changes in the value of
the Portfolio and other assets and liabilities of the Fund.

PUBLIC OFFERING PRICE

Net accrued interest and principal cash, if any, are added to the Public
Offering Price, the Sponsors' Repurchase Price and the Redemption Price per
Unit. This represents the interest accrued on the Bonds, net of Fund expenses,
from the initial date of deposit to, but not including, the settlement date for
Units (less any prior distributions of interest income to investors). Bonds
deposited also carry accrued but unpaid interest up to the initial date of
deposit. To avoid having investors pay this additional accrued interest (which
earns no return) when they purchase Units, the Trustee advances and distributes
this amount to the Sponsors; it recovers this advance from interest received on
the Bonds. Because of varying interest payment dates on the Bonds, accrued
interest at any time will exceed the interest actually received by the Fund.

Because accrued interest on the Bonds is not received by the Fund at a
constant rate throughout the year, any Monthly Income Distribution may be more
or less than the interest actually received by the Fund. To eliminate
fluctuations in the Monthly Income Distribution, a portion of the Public
Offering Price may consist of cash in an amount necessary for the Trustee to
provide approximately equal distributions. Upon the sale or redemption of Units,
investors will receive their proportionate share of this cash. In addition, if a
Bond is sold, redeemed or otherwise disposed of, the Fund will periodically
distribute to investors the portion of this cash that is attributable to the
Bond.

The regular Monthly Income Distribution is stated in Part A of the
Prospectus and will change as the composition of the Portfolio changes over
time.

7
<PAGE>
During the initial offering period and for at least the first three months
of the Fund, the Public Offering Price (and the Initial Repurchase Price) is
based on the higher, offer side evaluation of the Bonds at the next Evaluation
Time after the order is received. In the secondary market (after the initial
offering period), the Public Offering Price (and the Sponsors' Repurchase Price
and the Redemption Price) is based on the lower, bid side evaluation of the
Bonds.

The Fund does not have an up-front sales charge in the initial offering
period until after the deduction of the first quarterly Deferred Sales Charge
installment which will commence on the date indicated in part A of this
Prospectus. Units redeemed or repurchased prior to the accrual of the final
Deferred Sales Charge installment will have the amount of any remaining
installments deducted from the redemption or repurchase proceeds, although this
deduction will be waived in the event of the death or disability (as defined in
the Internal Revenue Code of 1986) of an investor. Units purchased after the
deduction of the first Deferred Sales Charge installment will be charged the
up-front per Unit sales charge indicated in Part A of this Prospectus based on
the Public Offering Price (less the value of the short-term bonds reserved to
pay the deferred sales charge not yet accrued), multiplied by the number of
Deferred Sales Charge installments already deducted. Units purchased after the
deduction of the final Deferred Sales Charge installment will be subject only to
an up-front sales charge based on the maturities of the bonds in the Portfolio,
as set forth in Appendix B.

The following table shows the maximum sales charge in the initial offering
period, reduced for the funds listed below on a graduated scale for sales to any
purchaser of at least 250 Units. To qualify for the reduced sales charge the
dealer must confirm that the sale is to a single purchaser as defined below or
is purchased for its own account and not for distribution.

MONTHLY PAYMENT SERIES, INSURED SERIES, STATE TRUSTS (LONG-TERM):

NUMBER OF UNITS MAXIMUM SALES CHARGE
- ---------------- ----------------------
1-249 $ 45.00
250-499 40.00
500-749 35.00
750-999 32.50
1,000 or more 30.00

INTERMEDIATE SERIES (10 YEAR) AND INTERMEDIATE STATE TRUSTS (10 YEAR):

NUMBER OF UNITS MAXIMUM SALES CHARGE
- ---------------- ----------------------
1-249 $ 40.20
250-499 35.00
500-749 32.50
750-999 30.00
1,000 or more 27.50

The graduated sales charge will apply on all purchases on any one day by the
same purchaser of Units, and purchases will not be aggregated with concurrent
purchases of any other unit trusts sponsored by the Sponsors. Units held in the
name of the purchaser's spouse or his child under age 21 are deemed to be
registered in the purchaser's name. The graduated sales charge is also
applicable to a trustee or other fiduciary purchasing securities for a single
trust estate or single fiduciary account.

Employees of certain of the Sponsors and their affiliates may buy Units at
prices based on a reduced sales charge of not less than $5.00 per Unit.

In the initial offering period the concession to dealers will be equal to:
the Public Offering Price less $30.00 per Unit for Monthly Payment Series,
Insured Series and long-term State Trusts; the Public Offering Price less $27.50
per Unit for Intermediate-Term Series (10 year) and Intermediate State Trusts;
and the Public Offering Price less $20.00 per Unit for Intermediate Term Series
(5 year).

Prudential Securities Incorporated will receive a preferred dealer
concession for Units of this Fund. In the initial offering period the concession
to preferred dealers will be equal to: the Public Offering Price less $31.50 per
Unit for Monthly Payment Series, Insured Series and long-term State Trusts; the
Public Offering Price less $28.00 per Unit for Intermediate-Term Series (10
year) and Intermediate State Trusts; and the Public Offering Price less $19.00
per Unit for Intermediate-Term Series (five year).

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Commercial banks and their securities broker subsidiaries that have
agreements with the Sponsors may make Units available to their customers as
their agents. A portion of the sales charge (equal to the dealer commission
referred to above), will be retained or remitted to the banks. Under the
Glass-Steagall Act, banks are prohibited from underwriting Units; however, the
Glass-Steagall Act permits banks to act as agents of their customers on a
disclosed basis and federal banking regulations have approved similar
arrangements. In addition, state securities laws on this issue may differ from
the interpretation of federal law expressed above and banks and financial
institutions may be required to register as dealers pursuant to state law.

EVALUATIONS

Evaluations are determined by the independent Evaluator on each Business
Day. This excludes Saturdays, Sundays and the following holidays as observed by
the New York Stock Exchange: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas. Bond evaluations are based on closing sales prices
(unless the Evaluator deems these prices inappropriate). If closing sales prices
are not available, the evaluation is generally determined on the basis of
current bid or offer prices for the Bonds or comparable securities or by
appraisal or by any combination of these methods. In the past, the bid prices of
publicly offered tax-exempt issues have been lower than the offer prices by as
much as 3 1/2% or more of face amount in the case of inactively traded issues
and as little as 1/2 of 1% in the case of actively traded issues, but the
difference between the offer and bid prices has averaged between 1 and 2% of
face amount. Neither the Sponsors, the Trustee or the Evaluator will be liable
for errors in the Evaluator's judgment. The fees of the Evaluator will be borne
by the Fund.

CERTIFICATES

Certificates for Units are issued upon request and may be transferred by
paying any taxes or governmental charges and by complying with the requirements
for redeeming Certificates (see How To Redeem or Sell Units--Redeeming Units
with the Trustee). Certain Sponsors collect additional charges for registering
and shipping Certificates to purchasers. Lost or mutilated Certificates can be
replaced upon delivery of satisfactory indemnity and payment of costs.

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<PAGE>
HOW TO REDEEM OR SELL UNITS

You can redeem your Units at any time for a price based on net asset value.
In addition, the Sponsors have maintained an uninterrupted secondary market for
Units for over 20 years and will ordinarily buy back Units at the same price.
The following describes these two methods to redeem or sell Units in greater
detail.

REDEEMING UNITS WITH THE TRUSTEE

You can always redeem your Units directly with the Trustee for net asset
value. This can be done by sending the Trustee a redemption request together
with any Unit certificates you hold, which must be properly endorsed or
accompanied by a written transfer instrument with signatures guaranteed by an
eligible institution. In certain instances, additional documents may be required
such as a trust instrument, certificate of corporate authority, certificate of
death or appointment as executor, administrator or guardian.

Within seven days after the Trustee's receipt of your request containing
the necessary documents, a check will be mailed to you in an amount based on the
net asset value of your Units. If you redeem or sell your Units before the final
deferred sales charge installment date, the remaining deferred sales charges
will be deducted from the net asset value. Because of sales charges, market
movements or changes in the Portfolio, net asset value at the time you redeem
your Units may be greater or less than the original cost of your Units. Net
asset value is calculated each Business Day by adding the value of the Bonds,
net accrued interest, cash and the value of any other Fund assets; deducting
unpaid taxes or other governmental charges, accrued but unpaid Fund expenses and
any remaining deferred sales charges, unreimbursed Trustee advances, cash held
to redeem Units or for distribution to investors and the value of any other Fund
liabilities; and dividing the result by the number of outstanding Units. Bonds
are evaluated on the offer side during the initial offering period and for at
least the first three months of the Fund (even in the secondary market) and on
the bid side thereafter.

As long as the Sponsors are maintaining a secondary market for Units (as
described below), the Trustee will not actually redeem your Units but will sell
them to the Sponsors for net asset value. If the Sponsors are not maintaining a
secondary market, the Trustee will redeem your Units for net asset value or will
sell your Units in the over-the-counter market if the Trustee believes it will
obtain a higher net price for your Units. If the Trustee is able to sell the
Units for a net price higher than net asset value, you will receive the net
proceeds of the sale.

If cash is not available in the Fund's Income and Capital Accounts to pay
redemptions, the Trustee may sell Bonds selected by the Agent for the Sponsors
based on market and credit factors determined to be in the best interest of the
Fund. These sales are often made at times when the Bonds would not otherwise be
sold and may result in lower prices than might be realized otherwise and may
also reduce the size and diversity of the Fund. If Bonds are being sold during a
time when additional Units are being created by the purchase of additional Bonds
(as described under Portfolio Selection), Bonds will be sold in a manner
designed to maintain, to the extent practicable, the proportionate relationship
among the face amounts of each Bond in the Portfolio.

The Trustee is authorized, on a redemption request for Units with a value
exceeding $250,000 by any investor who acquired 25% or more of the outstanding
Units of a Trust, to pay part or all of the redemption 'in kind' (by the
distribution of Bonds and cash with an aggregate value equal to the applicable
Redemption Price of the Units tendered for redemption). The Trustee will attempt
to make a pro rata distribution of Bonds in the Portfolio, but reserves the
right to distribute solely one or more Bonds. The distribution will be made to
the distribution agent and either held for the account of the investor or
disposed of in accordance with the instructions of the investor. Any transaction
costs as well as transfer and ongoing custodial fees on sales of the Bonds
distributed in kind will be borne by the redeeming investor.

Redemptions may be suspended or payment postponed (i) if the New York Stock
Exchange is closed (other than customary weekend and holiday closings), (ii) if
the SEC determines that trading on the New York Stock Exchange is restricted or
that an emergency exists making disposal or evaluation of the Bonds not
reasonably practicable or (iii) for any other period permitted by SEC order.

SPONSORS' SECONDARY MARKET FOR UNITS

The Sponsors, while not obligated to do so, will buy back Units at net
asset value without any other fee or charge as long as they are maintaining a
secondary market for Units. Because of sales charges, market movements or
changes in the portfolio, net asset value at the time you sell your Units may be
greater or less than the original cost of your

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<PAGE>
Units. The Sponsors may resell the Units to other buyers or redeem the Units by
tendering them to the Trustee. You should consult your financial professional
for current market prices to determine if other broker-dealers or banks are
offering higher prices for Units.

The Sponsors may discontinue the secondary market for Units without prior
notice if the supply of Units exceeds demand or for other business reasons.
Regardless of whether the Sponsors maintain a secondary market, you have the
right to redeem your Units for net asset value with the Trustee at any time, as
described above.

INCOME, DISTRIBUTIONS AND REINVESTMENT

INCOME

Some of the Bonds may have been purchased on a when-issued basis or may
have a delayed delivery. Since interest on these Bonds does not begin to accrue
until the date of their delivery to the Fund, the Trustee's annual fee and
expenses may be reduced to provide tax-exempt income to investors for this
non-accrual period. If a when-issued Bond is not delivered until later than
expected and the amount of the Trustee's annual fee and expenses is insufficient
to cover the additional accrued interest, the Sponsors will treat the contracts
as failed Bonds. The Trustee is compensated for its fee reduction by drawing on
the letter of credit deposited by the Sponsors before the settlement date for
these Bonds and depositing the proceeds in a non-interest bearing account for
the Fund.

Interest received is credited to an Income Account and other receipts to a
Capital Account. A Reserve Account may be created by withdrawing from the Income
and Capital Accounts amounts considered appropriate by the Trustee to reserve
for any material amount that may be payable out of the Fund.

DISTRIBUTIONS

Each Unit receives an equal share of monthly distributions of interest
income net of estimated expenses. Interest on the Bonds is generally received by
the Fund on a semi-annual or annual basis. Because interest on the Bonds is not
received at a constant rate throughout the year, any Monthly Income Distribution
may be more or less than the interest actually received. To eliminate
fluctuations in the Monthly Income Distribution, the Trustee will advance
amounts necessary to provide approximately equal interest distributions; it will
be reimbursed, without interest, from interest received on the Bonds, but the
Trustee is compensated, in part, by holding the Fund's cash balances in
non-interest bearing accounts. Along with the Monthly Income Distributions, the
Trustee will distribute the investor's pro rata share of principal received from
any disposition of a Bond to the extent available for distribution. In addition,
distributions of amounts necessary to pay the deferred sales charge will be made
from the Capital and Income Accounts to an account maintained by the Trustee for
purposes of satisfying investors' sales charge obligations.

The initial estimated annual income per Unit, after deducting estimated
annual Fund expenses and the portion of the deferred sales charge payable from
interest income) as stated in Part A of the Prospectus, will change as Bonds
mature, are called or sold or otherwise disposed of, as replacement bonds are
deposited and as Fund expenses change. Because the Portfolio is not actively
managed, income distributions will generally not be affected by changes in
interest rates. Depending on the financial conditions of the issuers of the
Bonds, the amount of income should be substantially maintained as long as the
Portfolio remains unchanged; however, optional bond redemptions or other
Portfolio changes may occur more frequently when interest rates decline, which
would result in early returns of principal and possibly earlier termination of
the Fund.

RETURN CALCULATIONS

Estimated Current Return shows the estimated annual cash to be received
from interest-bearing bonds in a Portfolio (net of estimated annual expenses)
divided by the Public Offering Price (including the maximum sales charge).
Estimated Long Term Return is a measure of the estimated return over the
estimated life of the Trust. This represents an average of the yields to
maturity (or in certain cases, to an earlier call date) of the individual Bonds
in the Portfolio, adjusted to reflect the maximum sales charge and estimated
expenses. The average yield for the Portfolio is derived by weighting each
Bond's yield by its market value and the time remaining to the call or maturity
date, depending on how the Bond is priced. Unlike Estimated Current Return,
Estimated Long Term Return takes into account maturities, discounts and premiums
of the underlying Bonds.

No return estimate can be predictive of your actual return because returns
will vary with purchase price (including sales charges), how long units are
held, changes in Portfolio composition, changes in interest income and changes

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<PAGE>
in fees and expenses. Therefore, Estimated Current Return and Estimated Long
Term Return are designed to be comparative rather than predictive. A yield
calculation which is more comparable to an individual Bond may be higher or
lower than Estimated Current Return or Estimated Long Term Return which are more
comparable to return calculations used by other investment products.

REINVESTMENT

Distributions will be paid in cash unless the investor elects to have
distributions reinvested without sales charge in the Municipal Fund Accumulation
Program, Inc. The Program is an open-end investment company whose investment
objective is to obtain income exempt from regular federal income taxes by
investing in a diversified portfolio of state, municipal and public authority
bonds rated A or better or with comparable credit characteristics. Reinvesting
compounds earnings free from federal tax. Advertisements and sales literature
may illustrate the effects of compounding at different hypothetical interest
rates. Investors participating in the Program will be subject to state and local
income taxes to the same extent as if the distributions had been received in
cash, and most of the income on the Program is subject to state and local income
taxes. For more complete information about the Program, including charges and
expenses, request the Program's prospectus from the Trustee. Read it carefully
before you decide to participate. Written notice of election to participate must
be received by the Trustee at least ten days before the Record Day for the first
distribution to which the election is to apply.

FUND EXPENSES

Estimated annual Fund expenses are listed in Part A of the Prospectus; if
actual expenses exceed the estimate, the excess will be borne by the Fund. The
Trustee's annual fee is payable in monthly installments. The Trustee also
benefits when it holds cash for the Fund in non-interest bearing accounts.
Possible additional charges include Trustee fees and expenses for maintaining
the Fund's registration statement current with Federal and State authorities,
extraordinary services, costs of indemnifying the Trustee and the Sponsors,
costs of action taken to protect the Fund and other legal fees and expenses,
Fund termination expenses and any governmental charges. The Trustee has a lien
on Fund assets to secure reimbursement of these amounts and may sell Bonds for
this purpose if cash is not available. The Sponsors receive an annual fee
currently estimated at $0.35 per $1,000 face amount to reimburse them for the
cost of providing Portfolio supervisory services to the Fund. While the fee may
exceed their costs of providing these services to the Fund, the total
supervision fees from all Series of Municipal Investment Trust Fund will not
exceed their costs for providing these services to all of those Series during
any calendar year. The Sponsors may also be reimbursed for their costs of
providing bookkeeping and administrative services to Defined Asset Funds,
currently estimated at $0.10 per Unit. The Trustee's, Sponsors' and Evaluator's
fees may be adjusted for inflation without investors' approval.

All or a portion of expenses incurred in establishing the Fund, including
the cost of the initial preparation of documents relating to the Fund, Federal
and State registration fees, the initial fees and expenses of the Trustee, legal
expenses and any other out-of-pocket expenses will be paid by the Fund and
amortized over five years. Advertising and selling expenses will be paid from
the Underwriting Account at no charge to the Fund. Sales charges on Defined
Asset Funds range from under 1.0% to 5.5%. This may be less than you might pay
to buy and hold a comparable managed fund. Defined Asset Funds can be a
cost-effective way to purchase and hold investments. Annual operating expenses
are generally lower than for managed funds. Because Defined Asset Funds have no
management fees, limited transaction costs and no ongoing marketing expenses,
operating expenses are generally less than 0.25% a year. When compounded
annually, small differences in expense ratios can make a big difference in your
investment results. Because our portfolios rarely hold any significant amount of
cash, your money is more fully invested.

TAXES

The following summary describes some of the important income tax
consequences of holding Units, assuming that the investor is not a dealer,
financial institution or insurance company or other investor with special
circumstances. Investors should consult their tax advisers about an investment
in the Fund.

At the date of issue of each Bond, counsel for the issuer delivered an
opinion to the effect that interest on the Bond is generally exempt from regular
federal income tax. However, interest may be subject to federal alternative
minimum tax or state and local taxes. Neither the Sponsors nor Davis Polk &
Wardwell, special counsel for the Sponsors, has reviewed the issuance of the
Bonds, related proceedings or the basis of the opinions of counsel for the
issuers. There can be no assurance, therefore, that the issuer (or other users)
have complied or will comply with any requirements necessary for a bond to be
tax-exempt. If any of the Bonds were determined not to be tax-exempt, investors

12
<PAGE>
might be required to pay income tax for current and prior years, and if the
Bonds were not then redeemed and the Fund were to sell the Bonds, it might have
to sell them at a substantial discount.

In the opinion of Davis Polk & Wardwell, under existing law:

GENERAL TREATMENT OF THE FUND

The Fund will not be taxed as a corporation for federal income tax
purposes, and each investor will be considered to own directly a share of each
Bond in the Fund.

INCOME OR LOSS UPON DISPOSITION

Upon a disposition of all or part of an investor's pro rata portion of a
Bond (by sale, exchange or redemption of the Bond or his Units), an investor
will generally recognize capital gain or loss. However, gain from the
disposition will generally be ordinary income to the extent of any accrued
'market discount'. An investor will generally have market discount to the extent
that his basis in a Bond when he purchases a Unit is less than its stated
redemption price at maturity (or, if it is an 'original issue discount' bond,
the issue price increased by 'original issue discount' that has accrued on the
Bond before the investor's purchase). Investors should consult their tax
advisers in this regard.

The excess of a non-corporate investor's net long-term capital gains over
his net short-term capital losses may be subject to tax at a lower rate than
ordinary income. A capital gain or loss is long-term if the investment is held
for more than one year and short-term if held for one year or less. Because the
deduction of capital losses is subject to limitations, an investor may not be
able to deduct all of his capital losses. An investor who is an individual and
has held his pro rata portions of Bonds for more than 18 months may be entitled
to a 20% maximum federal tax rate for gains from the sale of these Bonds or
corresponding Units. Investors should consult their tax advisers in this regard.

INVESTOR'S BASIS IN THE BONDS

An investor's aggregate basis in the Bonds will be equal to the cost of his
Units, including any sales charges and the organizational expenses borne by the
investor but excluding any amount paid for accrued interest, and adjusted to
reflect accruals of 'original issue discount', 'acquisition premium' and 'bond
premium'. Investors should consult their tax advisers in this regard.

EXPENSES

A non-corporate investor is not entitled to a deduction for his pro rata
share of fees and expenses of the Fund. Also, if an investor borrowed money in
order to purchase or carry his Units, he will not be able to deduct the interest
on this borrowing. The Internal Revenue Service may treat an investor's purchase
of Units as made with borrowed money even if the borrowed money was not directly
used to purchase the Units.

STATE AND LOCAL TAXES

Under the income tax laws of the State and City of New York, the Fund will
not be taxed as a corporation. The income recognized by investors that are New
York taxpayers will not be tax-exempt in New York except to the extent it is
earned on Bonds that are tax-exempt for New York purposes. Depending on where
investors live, income from the Fund may be subject to state and local taxation.
Investors should consult their tax advisers in this regard.

RECORDS AND REPORTS

The Trustee keeps a register of the names, addresses and holdings of all
investors. The Trustee also keeps records of the transactions of the Fund,
including a current list of the Bonds and a copy of the Indenture, and
supplemental information on the operations of the Fund and the risks associated
with the Bonds held by the Fund, which may be inspected by investors at
reasonable times during business hours.

With each distribution, the Trustee includes a statement of the interest
and any other receipts being distributed. Within five days after deposit of
Bonds in exchange or substitution for Bonds (or contracts) previously deposited,
the Trustee will send a notice to each investor, identifying both the Bonds
removed and the replacement bonds deposited. The Trustee sends each investor of
record an annual report summarizing transactions in the Fund's accounts and
amounts distributed during the year and Bonds held, the number of Units
outstanding and the Redemption Price at year end, the interest received by the
Fund on the Bonds, the cash proceeds received by the Fund from the disposition
of any Bond (resulting from redemption or payment at maturity or sale of any
Bond), and the fees and expenses paid

13
<PAGE>
by the Fund, among other matters. The Trustee will also furnish annual
information returns to each investor and to the Internal Revenue Service.
Investors are required to report to the Internal Revenue Service the amount of
tax-exempt interest received during the year. Investors may obtain copies of
Bond evaluations from the Trustee to enable them to comply with federal and
state tax reporting requirements. Fund accounts are audited annually by
independent accountants selected by the Sponsors. Audited financial statements
are available from the Trustee on request.

TRUST INDENTURE

The Fund is a 'unit investment trust' created under New York law by a Trust
Indenture among the Sponsors, the Trustee and the Evaluator. This Prospectus
summarizes various provisions of the Indenture, but each statement is qualified
in its entirety by reference to the Indenture.

The Indenture may be amended by the Sponsors and the Trustee without
consent by investors to cure ambiguities or to correct or supplement any
defective or inconsistent provision, to make any amendment required by the SEC
or other governmental agency or to make any other change not materially adverse
to the interest of investors (as determined in good faith by the Sponsors). The
Indenture may also generally be amended upon consent of investors holding 51% of
the Units. No amendment may reduce the interest of any investor in the Fund
without the investor's consent or reduce the percentage of Units required to
consent to any amendment without unanimous consent of investors. Investors will
be notified on the substance of any amendment.

The Trustee may resign upon notice to the Sponsors. It may be removed by
investors holding 51% of the Units at any time or by the Sponsors without the
consent of investors if it becomes incapable of acting or bankrupt, its affairs
are taken over by public authorities, or if under certain conditions the
Sponsors determine in good faith that its replacement is in the best interest of
the investors. The Evaluator may resign or be removed by the Sponsors and the
Trustee without the investors' consent. The resignation or removal of either
becomes effective upon acceptance of appointment by a successor; in this case,
the Sponsors will use their best efforts to appoint a successor promptly;
however, if upon resignation no successor has accepted appointment within 30
days after notification, the resigning Trustee or Evaluator may apply to a court
of competent jurisdiction to appoint a successor.

Any Sponsor may resign so long as one Sponsor with a net worth of
$2,000,000 remains and is agreeable to the resignation. A new Sponsor may be
appointed by the remaining Sponsors and the Trustee to assume the duties of the
resigning Sponsor. If there is only one Sponsor and it fails to perform its
duties or becomes incapable of acting or bankrupt or its affairs are taken over
by public authorities, the Trustee may appoint a successor Sponsor at reasonable
rates of compensation, terminate the Indenture and liquidate the Fund or
continue to act as Trustee without a Sponsor. Merrill Lynch, Pierce, Fenner &
Smith Incorporated has been appointed as Agent for the Sponsors by the other
Sponsors.

The Sponsors, the Trustee and the Evaluator are not liable to investors or
any other party for any act or omission in the conduct of their responsibilities
absent bad faith, willful misfeasance, negligence (gross negligence in the case
of a Sponsor or the Evaluator) or reckless disregard of duty. The Indenture
contains customary provisions limiting the liability of the Trustee.

MISCELLANEOUS

LEGAL OPINION

The legality of the Units has been passed upon by Davis Polk & Wardwell,
450 Lexington Avenue, New York, New York 10017, as special counsel for the
Sponsors.

AUDITORS

The Statement of Condition in the Prospectus was audited by Deloitte &
Touche LLP, independent accountants, as stated in their opinion. It is included
in reliance upon that opinion given on the authority of that firm as experts in
accounting and auditing.

TRUSTEE

The Trustee and its address are stated on the back cover of the Prospectus.
The Trustee is subject to supervision by the Federal Deposit Insurance
Corporation, the Board of Governors of the Federal Reserve System and New York
State banking authorities.

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<PAGE>
SPONSORS

The Sponsors are listed on the back cover of the Prospectus. They may
include Merrill Lynch, Pierce, Fenner & Smith Incorporated, a wholly-owned
subsidiary of Merrill Lynch Co. Inc.; Smith Barney Inc., an indirect wholly-
owned subsidiary of The Travelers Inc.; Dean Witter Reynolds, Inc., a principal
operating subsidiary of Morgan Stanley, Dean Witter, Discover & Co. and
PaineWebber Incorporated, a wholly-owned subsidiary of PaineWebber Group Inc.
Each Sponsor, or one of its predecessor corporations, has acted as Sponsor of a
number of series of unit investment trusts. Each Sponsor has acted as principal
underwriter and managing underwriter of other investment companies. The
Sponsors, in addition to participating as members of various selling groups or
as agents of other investment companies, execute orders on behalf of investment
companies for the purchase and sale of securities of these companies and sell
securities to these companies in their capacities as brokers or dealers in
securities.

CODE OF ETHICS

The Agent for the Sponsors has adopted a code of ethics requiring
preclearance and reporting of personal securities transactions by its personnel
who have access to information on Defined Asset Funds portfolio transactions.
The code is intended to prevent any act, practice or course of conduct which
would operate as a fraud or deceit on any Fund and to provide guidance to these
persons regarding standards of conduct consistent with the Agent's
responsibilities to the Funds.

PUBLIC DISTRIBUTION

In the initial offering period Units will be distributed to the public
through the Underwriting Account and dealers who are members of the National
Association of Securities Dealers, Inc. The initial offering period is 30 days
or less if all Units are sold. If some Units initially offered have not been
sold, the Sponsors may extend the initial offering period for up to four
additional successive 30-day periods.

The Sponsors intend to qualify Units for sale in all states in which
qualification is deemed necessary through the Underwriting Account and by
dealers who are members of the National Association of Securities Dealers, Inc.;
however, Units of a State trust will be offered for sale only in the State for
which the trust is named, except that Units of a New Jersey trust will also be
offered in Connecticut, Units of a Florida trust will also be offered in New
York and Units of a New York trust will also be offered in Connecticut, Florida
and Puerto Rico. The Sponsors do not intend to qualify Units for sale in any
foreign countries and this Prospectus does not constitute an offer to sell Units
in any country where Units cannot lawfully be sold. Sales to dealers and to
introducing dealers, if any, will initially be made at prices which represent a
concession from the Public Offering Price, but the Agent for the Sponsors
reserves the right to change the rate of any concession from time to time. Any
dealer or introducing dealer may reallow a concession up to the concession to
dealers.

UNDERWRITERS' AND SPONSORS' PROFITS

Upon sale of the Units, the Underwriters will be entitled to receive sales
charges. The Sponsors also realize a profit or loss on deposit of the Bonds
equal to the difference between the cost of the Bonds to the Fund (based on the
offer side evaluation on the initial date of deposit) and the Sponsors' cost of
the Bonds. In addition, a Sponsor or Underwriter may realize profits or sustain
losses on Bonds it deposits in the Fund which were acquired from underwriting
syndicates of which it was a member. During the initial offering period, the
Underwriting Account also may realize profits or sustain losses as a result of
fluctuations after the initial date of deposit in the Public Offering Price of
the Units. In maintaining a secondary market for Units, the Sponsors will also
realize profits or sustain losses in the amount of any difference between the
prices at which they buy Units and the prices at which they resell these Units
(which include the sales charge) or the prices at which they redeem the Units.
Cash, if any, made available by buyers of Units to the Sponsors prior to a
settlement date for the purchase of Units may be used in the Sponsors'
businesses to the extent permitted by Rule 15c3-3 under the Securities Exchange
Act of 1934 and may be of benefit to the Sponsors.

FUND PERFORMANCE

Information on the performance of the Fund for various periods, on the
basis of changes in Unit price plus the amount of income and principal
distributions reinvested, may be included from time to time in advertisements,
sales literature, reports and other information furnished to current or
prospective investors. Total return figures are not averaged, and may not
reflect deduction of the sales charge, which would decrease the return. Average
annualized return figures reflect deduction of the maximum sales charge. No
provision is made for any income taxes payable.

15
<PAGE>
Fund performance may be compared to performance on the same basis (with
distributions reinvested) of Moody's Municipal Bond Averages or performance data
from publications such as Lipper Analytical Services, Inc., Morningstar
Publications, Inc., Money Magazine, The New York Times, U.S. News and World
Report, Barron's Business Week, CDA Investment Technology, Inc., Forbes Magazine
or Fortune Magazine. Average annual compounded rates of return of selected asset
classes over various periods of time may also be compared to the rate of
inflation over the same periods.

DEFINED ASSET FUNDS

Municipal Investment Trust Funds have provided investors with tax-free
income and balance for their portfolios for more than 30 years. As tax reforms
over the years have eliminated many of the ways to reduce individual taxes,
municipal bonds have remained a significant source of tax-free income. For
decades informed investors have purchased unit investment trusts for
dependability and professional selection of investments. Defined Asset Funds'
philosophy is to allow investors to 'buy with knowledge' (because, unlike
managed funds, the portfolio of municipal bonds and the return are generally
fixed) and 'hold with confidence' (because the portfolio is professionally
selected and regularly reviewed). Defined Asset Funds offers an array of simple
and convenient investment choices, suited to fit a wide variety of personal
financial goals--a buy and hold strategy for capital accumulation, such as for
children's education or retirement, or attractive, regular current income
consistent with the preservation of principal. Tax-exempt income can help
investors keep more today for a more secure financial future. It can also be
important in planning because tax brackets may increase with higher earnings or
changes in tax laws. Defined equity funds offer growth potential and some
protection against inflation. Unit investment trusts are particularly suited for
the many investors who prefer to seek long-term income by purchasing sound
investments and holding them, rather than through active trading. Few
individuals have the knowledge, resources or capital to buy and hold a
diversified portfolio on their own; it would generally take a considerable sum
of money to obtain the breadth and diversity that Defined Asset Funds offer.
One's investment objectives may call for a combination of Defined Asset Funds.

Defined Asset Funds reflect a buy and hold strategy that the Sponsors
believe can be more effective and cost-effective than active management. This
strategy is premised on selection criteria and procedures, diversification and
regular review by investment professionals. Various advertisements and sales
literature may summarize the results of economic studies concerning how stock
market movement has tended to be concentrated and how longer-term investments
can tend to reduce risk.

One of the most important investment decisions you face may be how to
allocate your investments among asset classes. Diversification among different
kinds of investments can balance the risks and rewards of each one. Most
investment experts recommend stocks for long-term capital growth. Long-term
corporate bonds offer relatively high rates of interest income.

EXCHANGE OPTION

You may exchange Units of the Fund for units of certain other Defined Asset
Funds subject only to a reduced sales charge.

Upon the deduction of the final Deferred Sales Charge installment for the
Fund, you may exchange your units of any Municipal Investment Trust Fund
Intermediate Term Series with a regular maximum sales charge of at least 3.25%,
of any other Defined Asset Fund with a regular maximum sales charge of at least
3.50%, or of any unaffiliated unit trust with a regular maximum sales charge of
at least 3.0%, for Units of this Fund at their relative net asset values,
subject only to a reduced sales charge or to any remaining deferred sales charge
on the units being exchanged, as applicable.

To make an exchange, you should contact your financial professional to find
out what suitable Exchange Funds are available and to obtain a prospectus. You
may acquire units of only those Exchange Funds in which the Sponsors are
maintaining a secondary market and which are lawfully for sale in the state
where you reside. An exchange is a taxable event normally requiring recognition
of any gain or loss on the units exchanged. However, the Internal Revenue
Service may seek to disallow a loss if the portfolio of the units acquired is
not materially different from the portfolio of the units exchanged; you should
consult your own tax adviser. If the proceeds of units exchanged are
insufficient to acquire a whole number of Exchange Fund units, you may pay the
difference in cash (not exceeding the price of a single unit acquired).

16
<PAGE>
As the Sponsors are not obligated to maintain a secondary market in any
series, there can be no assurance that units of a desired series will be
available for exchange. The Exchange Option may be amended or terminated at any
time without notice.

SUPPLEMENTAL INFORMATION

Upon writing or calling the Trustee shown on the back cover of Part A of
this Prospectus, investors will receive at no cost to the investor supplemental
information about the Fund, which has been filed with the SEC. The supplemental
information includes more detailed risk factor disclosure about the types of
Bonds that may be part of the Fund's Portfolio, general risk disclosure
concerning any letters of credit or insurance securing certain Bonds, and
general information about the structure and operation of the Fund.

17
<PAGE>
APPENDIX A

DESCRIPTION OF RATINGS (AS DESCRIBED BY THE RATING COMPANIES THEMSELVES)

STANDARD & POOR'S RATINGS GROUP, A DIVISION OF MCGRAW-HILL, INC.

AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.

AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.

A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.

BBB--Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.

BB, B, CCC, CC--Debt rated BB, B, CCC and CC is regarded, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.

The ratings from AA to CCC may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.

A provisional rating, indicated by 'p' following a rating, assumes the
successful completion of the project being financed by the issuance of the debt
being rated and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful and timely completion of the project.
This rating, however, while addressing credit quality subsequent to completion
of the project, makes no comment on the likelihood of, or the risk of default
upon failure of, such completion.

* Continuance of the rating is contingent upon S&P's receipt of an executed
copy of the escrow agreement or closing documentation confirming investments and
cash flows.

NR--Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.

MOODY'S INVESTORS SERVICE, INC.

Aaa--Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
'gilt edge'. Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.

Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.

A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.

Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

a-1
<PAGE>
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

Rating symbols may include numerical modifiers 1, 2 or 3. The numerical
modifier 1 indicates that the security ranks at the high end, 2 in the
mid-range, and 3 nearer the low end, of the generic category. These modifiers of
rating symbols give investors a more precise indication of relative debt quality
in each of the historically defined categories.

Conditional ratings, indicated by 'Con.', are sometimes given when the
security for the bond depends upon the completion of some act or the fulfillment
of some condition. Such bonds are given a conditional rating that denotes their
probable credit stature upon completion of that act or fulfillment of that
condition.

NR--Should no rating be assigned, the reason may be one of the following:
(a) an application for rating was not received or accepted; (b) the issue or
issuer belongs to a group of securities that are not rated as a matter of
policy; (c) there is a lack of essential data pertaining to the issue or issuer
or (d) the issue was privately placed, in which case the rating is not published
in Moody's publications.

FITCH INVESTORS SERVICE, INC.

AAA--These bonds are considered to be investment grade and of the highest
quality. The obligor has an extraordinary ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.

AA--These bonds are considered to be investment grade and of high quality.
The obligor's ability to pay interest and repay principal, while very strong, is
somewhat less than for AAA rated securities or more subject to possible change
over the term of the issue.

A--These bonds are considered to be investment grade and of good quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.

BBB--These bonds are considered to be investment grade and of satisfactory
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however are more likely to weaken this ability than bonds with higher ratings.

A '+' or a '-' sign after a rating symbol indicates relative standing in
its rating.

DUFF & PHELPS CREDIT RATING CO.

AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.

AA--High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic condtions.

A--Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.

A '+' or a '-' sign after a rating symbol indicates relative standing in
its rating.

a-2
<PAGE>
APPENDIX B
SECONDARY MARKET SALES CHARGE SCHEDULE

Units purchased after the deduction of the final deferred sales charge
installment will be subject only to an up-front sales charge based on the
maturities of the bonds in the Portfolio, as set forth below.

ACTUAL SALES CHARGE AS DEALER CONCESSION AS
PERCENT OF EFFECTIVE PERCENT OF EFFECTIVE
NUMBER OF UNITS SALES CHARGE SALES CHARGE
- ---------------- ----------------------- -----------------------
1-249 100% 65.00%
250-499 80 52.00
500-749 60 39.00
750-999 45 29.25
1,000 or more 35 22.75

EFFECTIVE SALES CHARGE

AS PERCENT AS PERCENT
TIME TO OF BID SIDE OF PUBLIC
MATURITY EVALUATION OFFERING PRICE
- -------------------------------- ----------- -----------------
Less than six months 0% 0%
Six months to less than 1 year 0.503 0.50
1 year to less than 2 years 1.010 1.00
2 years to less than 3 years 1.523 1.50
3 years to less than 4 years 2.302 2.25
4 years to less than 5 years 2.828 2.75
5 years to less than 6 years 3.093 3.00
6 years to less than 7 years 3.359 3.25
7 years to less than 8 years 3.627 3.50
8 years to less than 9 years 4.167 4.00
9 years to less than 12 years 4.439 4.25
12 years to less than 15 years 4.712 4.50
15 years or more 5.820 5.50

For this purpose, a Bond will be considered to mature on its stated
maturity date unless: it has been called for redemption; (although not called)
its yield to maturity is more than 40 basis points higher than its yield to any
call date; funds or securities have been placed in escrow to redeem it on an
earlier date; or the Bond is subject to a mandatory tender. In each of these
cases the earlier date will be considered the maturity date.

b-1
<PAGE>
Defined
Asset FundsSM

SPONSORS: MUNICIPAL INVESTMENT
Merrill Lynch, TRUST FUND
Pierce, Fenner & Smith Incorporated Monthly Payment Series--612
Defined Asset Funds (A Unit Investment Trust)
P.O. Box 9051 This Prospectus does not contain all of
Princeton, NJ 08543-9051 the information with respect to the
(609) 282-8500 investment company set forth in its
Smith Barney Inc. registration statement and exhibits
Unit Trust Department relating thereto which have been filed
388 Greenwich Street--23rd Floor with the Securities and Exchange
New York, NY 10013 Commission, Washington, D.C. under the
(212) 816-4000 Securities Act of 1933 and the
PaineWebber Incorporated Investment Company Act of 1940, and to
1200 Harbor Blvd. which reference is hereby made. Copies
Weehawken, NJ 07087 of filed material can be obtained from
(201) 902-3000 the Public Reference Section of the
Dean Witter Reynolds Inc. Commission, 450 Fifth Street, N.W.,
Two World Trade Center--59th Floor Washington, D.C. 20549 at prescribed
New York, NY 10048 rates. The Commission also maintains a
(212) 392-2222 Web site that contains information
EVALUATOR: statements and other information
Kenny S&P Evaluation Services, regarding registrants such as Defined
a division of J. J. Kenny Co., Inc. Asset Funds that file electronically
65 Broadway with the Commission at
New York, NY 10006 http://www.sec.gov.
TRUSTEE: ------------------------------
The Chase Manhattan Bank No person is authorized to give any
Customer Service Retail Department information or to make any
Bowling Green Station representations with respect to this
P.O. Box 5187 investment company not contained in
New York, NY 10274-5187 this Prospectus; and any information or
1-800-323-1508 representation not contained herein
must not be relied upon as having been
authorized.
------------------------------
When Units of this Fund are no longer
available this Prospectus may be used
as a preliminary prospectus for a
future series, and investors should
note the following:
Information contained herein is subject
to amendment. A registration statement
relating to securities of a future
series has been filed with the
Securities and Exchange Commission.
These securities may not be sold nor
may offers to buy be accepted prior to
the time the registration statement
becomes effective.
This Prospectus shall not constitute an
offer to sell or the solicitation of an
offer to buy nor shall there be any
sale of these securities in any State
in which such offer, solicitation or
sale would be unlawful prior to
qualification under the securities laws
of any such State.

70056--3/98

<PAGE>
PART II
ADDITIONAL INFORMATION NOT INCLUDED IN THE PROSPECTUS

A. The following information relating to the Depositors is incorporated by
reference to the SEC filings indicated and made a part of this Registration
Statement.

I. Bonding arrangements of each of the Depositors are incorporated by reference
to Item A of Part II to the Registration Statement on Form S-6 under the
Securities Act of 1933 for Municipal Investment Trust Fund, Monthly Payment
Series--573 Defined Asset Funds (Reg. No. 333-08241).

II. The date of organization of each of the Depositors is set forth in Item B
of Part II to the Registration Statement on Form S-6 under the Securities Act of
1933 for Municipal Investment Trust Fund, Monthly Payment Series--573 Defined
Asset Funds (Reg. No. 333-08241) and is herein incorporated by reference
thereto.

III. The Charter and By-Laws of each of the Depositors are incorporated herein
by reference to Exhibits 1.3 through 1.12 to the Registration Statement on Form
S-6 under the Securities Act of 1933 for Municipal Investment Trust Fund,
Monthly Payment Series--573 Defined Asset Funds (Reg. No. 333-08241).

IV. Information as to Officers and Directors of the Depositors has been filed
pursuant to Schedules A and D of Form BD under Rules 15b1-1 and 15b3-1 of the
Securities Exchange Act of 1934 and is incorporated by reference to the SEC
filings indicated and made a part of this Registration Statement:

Merrill Lynch, Pierce, Fenner & Smith Incorporated 8-7221
Smith Barney Inc. ........................................ 8-8177
PaineWebber Incorporated.................................. 8-16267
Dean Witter Reynolds Inc. ................................ 8-14172

------------------------------------

B. The Internal Revenue Service Employer Identification Numbers of the
Sponsors and Trustee are as follows:

Merrill Lynch, Pierce, Fenner & Smith Incorporated 13-5674085
Smith Barney Inc. ........................................ 13-1912900
PaineWebber Incorporated.................................. 13-2638166
Dean Witter Reynolds Inc. ................................ 94-0899825
The Chase Manhattan Bank, Trustee......................... 13-4994650

UNDERTAKING
The Sponsors undertake that they will not instruct the Trustee to accept from
(i) Asset Guaranty Reinsurance Company, Municipal Bond Investors Assurance
Corporation or any other insurance company affiliated with any of the Sponsors,
in settlement of any claim, less than an amount sufficient to pay any principal
or interest (and, in the case of a taxability redemption, premium) then due on
any Security in accordance with the municipal bond guaranty insurance policy
attached to such Security or (ii) any affiliate of the Sponsors who has any
obligation with respect to any Security, less than the full amount due pursuant
to the obligation, unless such instructions have been approved by the Securities
and Exchange Commission pursuant to Rule 17d-1 under the Investment Company Act
of 1940.

II-1
<PAGE>
SERIES OF MUNICIPAL INVESTMENT TRUST FUND, EQUITY INCOME FUND
AND DEFINED ASSET FUNDS MUNICIPAL INSURED SERIES
DESIGNATED PURSUANT TO RULE 487 UNDER THE SECURITIES ACT OF 1933

SEC
SERIES NUMBER FILE NUMBER
- --------------------------------------------------------------------------------
Municipal Investment Trust Fund:
Thirty-Eighth Intermediate Term Series................. 2-84267
Thirty-Eighth Insured Series........................... 2-96953
Four Hundred Thirty-Eighth Monthly Payment Series...... 33-16561
Multistate Series 6E................................... 33-29412
Multistate Series--48.................................. 33-50247
Multistate Series--83.................................. 33-57443
Monthly Payment Series--600............................ 333-13265
Defined Asset Funds Municipal Insured Series................ 33-54565
Equity Income Fund, Select Ten Portfolio--1995 Spring
Series...................................................... 33-55807

CONTENTS OF REGISTRATION STATEMENT
The Registration Statement on Form S-6 comprises the following papers and
documents:

The facing sheet of Form S-6.

The Cross-Reference Sheet (incorporated by reference to the Cross-Reference
Sheet to the Registration Statement of Defined Asset Funds Municipal Series,
1933 Act File No. 33-54565).

The Prospectus.

Additional Information not included in the Prospectus (Part II).

The following exhibits:

1.1 --Form of Trust Indenture (incorporated by reference to Exhibit 1.1 to
the Registration Statement of Municipal Investment Trust Fund,
Multistate Series-89, 1933 Act File No. 33-58531).
1.1.1 --Form of Standard Terms and Conditions of Trust Effective October 21,
1993 (incorporated by reference to Exhibit 1.1.1 to the Registration
Statement of Municipal Investment Trust Fund, Multistate Series-48,
1933 Act File No. 33-50247).
1.2 --Form of Master Agreement Among Underwriters (incorporated by reference
to Exhibit 1.2 to the Registration Statement of The Corporate Income
Fund, One Hundred Ninety-Fourth Monthly Payment Series, 1933 Act File
No. 2-90925).
2.1 --Form of Certificate of Beneficial Interest (included in Exhibit
1.1.1).
3.1 --Opinion of counsel as to the legality of the securities being issued
including their consent to the use of their names under the headings
'Taxes' and 'Miscellaneous--Legal Opinion' in the Prospectus.
4.1 --Consent of the Evaluator.
5.1 --Consent of independent accountants.

9.1 --Information Supplement.

R-1
<PAGE>

MUNICIPAL INVESTMENT TRUST FUND
MONTHLY PAYMENT SERIES--612
DEFINED ASSET FUNDS

SIGNATURES

The registrant hereby identifies the series numbers of Municipal Investment
Trust Fund, Equity Income Fund and Defined Asset Funds Municipal Insured Series
listed on page R-1 for the purposes of the representations required by Rule 487
and represents the following:

1) That the portfolio securities deposited in the series as to which this
registration statement is being filed do not differ materially in type
or quality from those deposited in such previous series;

2) That, except to the extent necessary to identify the specific portfolio
securities deposited in, and to provide essential information for, the
series with respect to which this registration statement is being filed,
this registration statement does not contain disclosures that differ in
any material respect from those contained in the registration statements
for such previous series as to which the effective date was determined
by the Commission or the staff; and

3) That it has complied with Rule 460 under the Securities Act of 1933.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT OR AMENDMENT TO THE REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY
AUTHORIZED IN THE CITY OF NEW YORK AND STATE OF NEW YORK ON THE 12TH DAY OF
MARCH, 1998.

SIGNATURES APPEAR ON PAGES R-3, R-4, R-5 AND R-6.

A majority of the members of the Board of Directors of Merrill Lynch,
Pierce, Fenner & Smith Incorporated has signed this Registration Statement or
Amendment to the Registration Statement pursuant to Powers of Attorney
authorizing the person signing this Registration Statement or Amendment to the
Registration Statement to do so on behalf of such members.

A majority of the members of the Board of Directors of Smith Barney Inc.
has signed this Registration Statement or Amendment to the Registration
Statement pursuant to Powers of Attorney authorizing the person signing this
Registration Statement or Amendment to the Registration Statement to do so on
behalf of such members.

A majority of the members of the Executive Committee of the Board of
Directors of PaineWebber Incorporated has signed this Registration Statement or
Amendment to the Registration Statement pursuant to Powers of Attorney
authorizing the person signing this Registration Statement or Amendment to the
Registration Statement to do so on behalf of such members.

A majority of the members of the Board of Directors of Dean Witter Reynolds
Inc. has signed this Registration Statement or Amendment to the Registration
Statement pursuant to Powers of Attorney authorizing the person signing this
Registration Statement or Amendment to the Registration Statement to do so on
behalf of such members.

R-2
<PAGE>
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
DEPOSITOR

By the following persons, who constitute Powers of Attorney have been filed
a majority of under
the Board of Directors of Merrill Form SE and the following 1933 Act
Lynch, Pierce, File
Fenner & Smith Incorporated: Number: 33-43466 and 33-51607

HERBERT M. ALLISON, JR.
BARRY S. FREIDBERG
EDWARD L. GOLDBERG
STEPHEN L. HAMMERMAN
JEROME P. KENNEY
DAVID H. KOMANSKY
DANIEL T. NAPOLI
THOMAS H. PATRICK
JOHN L. STEFFENS
ROGER M. VASEY
ARTHUR H. ZEIKEL
DANIEL C. TYLER
(As authorized signatory for Merrill Lynch, Pierce,
Fenner & Smith Incorporated and
Attorney-in-fact for the persons listed above)

R-3
<PAGE>
SMITH BARNEY INC.
DEPOSITOR

By the following persons, who constitute a majority of Powers of Attorney
the Board of Directors of Smith Barney Inc.: have been filed
under the 1933 Act
File Numbers:
33-49753,
33-55073,
333-10441 and
333-41765

JAMES DIMON
DERYCK C. MAUGHAN

By GINA LEMON
(As authorized signatory for
Smith Barney Inc. and
Attorney-in-fact for the persons listed above)

R-4
<PAGE>
PAINEWEBBER INCORPORATED
DEPOSITOR

By the following persons, who constitute Powers of Attorney have been filed
the Board of Directors of PaineWebber under
Incorporated: the following 1933 Act File
Number: 33-55073

MARGO N. ALEXANDER
TERRY L. ATKINSON
BRIAN M. BAREFOOT
STEVEN P. BAUM
MICHAEL CULP
REGINA A. DOLAN
JOSEPH J. GRANO, JR.
EDWARD M. KERSCHNER
JAMES P. MacGILVRAY
DONALD B. MARRON
ROBERT H. SILVER
MARK B. SUTTON
By
ROBERT E. HOLLEY
(As authorized signatory for
PaineWebber Incorporated
and Attorney-in-fact for the persons listed above)

R-5
<PAGE>
DEAN WITTER REYNOLDS INC.
DEPOSITOR

By the following persons, who constitute Powers of Attorney have been filed
a majority of under Form SE and the following 1933
the Board of Directors of Dean Witter Act File Numbers: 33-17085 and
Reynolds Inc.: 333-13039

RICHARD M. DeMARTINI
ROBERT J. DWYER
CHRISTINE A. EDWARDS
CHARLES A. FIUMEFREDDO
JAMES F. HIGGINS
MITCHELL M. MERIN
STEPHEN R. MILLER
RICHARD F. POWERS III
PHILIP J. PURCELL
THOMAS C. SCHNEIDER
WILLIAM B. SMITH
By
MICHAEL D. BROWNE
(As authorized signatory for
Dean Witter Reynolds Inc.
and Attorney-in-fact for the persons listed above)

R-6

EXHIBIT 3.1
DAVIS POLK & WARDWELL
450 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 450-4000

March 12, 1998

MUNICIPAL INVESTMENT TRUST FUND,
MONTHLY PAYMENT SERIES--612
DEFINED ASSET FUNDS

MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
SMITH BARNEY INC.
PAINEWEBBER INCORPORATED
DEAN WITTER REYNOLDS INC.
C/O MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
DEFINED ASSET FUNDS
P.O. BOX 9051
PRINCETON, NJ 08543-9051

Dear Sirs:

We have acted as special counsel for you, as sponsors (the 'Sponsors') of
Monthly Payment Series--612 of Municipal Investment Trust Fund, Defined Asset
Funds (the 'Fund'), in connection with the issuance of units of fractional
undivided interest in the Fund (the 'Units') in accordance with the Trust
Indenture relating to the Fund (the 'Indenture').

We have examined and are familiar with originals or copies, certified or
otherwise identified to our satisfaction, of such documents and instruments as
we have deemed necessary or advisable for the purpose of this opinion.

Based upon the foregoing, we are of the opinion that (i) the execution and
delivery of the Indenture and the issuance of the Units have been duly
authorized by the Sponsor and (ii) the Units, when duly issued and delivered by
the Sponsors and the Trustee in accordance with the Indenture, will be legally
issued, fully paid and non-assessable.

We hereby consent to the use of this opinion as Exhibit 3.1 of the
Registration Statement relating to the Units filed under the Securities Act of
1933 and to the use of our name in such Registration Statement and in the
related prospectus under the headings 'Taxes' and 'Miscellaneous--Legal
Opinion.'

Very truly yours,

DAVIS POLK & WARDWELL

EXHIBIT 4.1

KENNY S&P EVALUATION SERVICES
A Division of J.J. Kenny Co., Inc.
65 Broadway
New York, New York 10006-2511
Telephone 212/770-4422
Fax 212/797-8681
Frank A. Ciccotto, Jr.
Vice President

MARCH 12, 1998

MERRILL LYNCH PIERCE FENNER & SMITH INCORPORATED
DEFINED ASSET FUNDS
P.O. BOX 9051
PRINCETON, NJ 08543-9051

THE CHASE MANHATTAN BANK
UNIT INVESTMENT TRUST DIVISION
4 NEW YORK PLAZA--6TH FLOOR
NEW YORK, NY 10004

RE: MUNICIPAL INVESTMENT TRUST FUND, MONTHLY PAYMENT SERIES--612, DEFINED ASSET
FUNDS

Gentlemen:

We have examined the Registration Statement File No. 333-41287 for the
above captioned trust. We hereby acknowledge that Kenny S&P Evaluation Services,
a division of J. J. Kenny Co., Inc. is currently acting as the evaluator for the
trust. We hereby consent to the use in the Registration Statement of the
reference to Kenny S&P Evaluation Services, a division of J. J. Kenny Co., Inc.
as evaluator.

In addition, we hereby confirm that the ratings indicated in the
Registration Statement for the respective bonds comprising the trust portfolio
are the ratings indicated in our KENNYBASE database as of the date of the
Evaluation Report.

You are hereby authorized to file a copy of this letter with the Securities
and Exchange Commission.

Sincerely,

FRANK A. CICCOTTO, JR.
Vice President

EXHIBIT 5.1
CONSENT OF INDEPENDENT ACCOUNTANTS

The Sponsors and Trustee of Municipal Investment Trust Fund,
Monthly Payment Series--612, Defined Asset Funds:

We consent to the use in this Registration Statement No. 333-41287 of our report
dated March 12, 1998, relating to the Statement of Condition of Municipal
Investment Trust Fund, Monthly Payment Series--612, Defined Asset Funds and to
the reference to us under the heading 'Miscellaneous--Auditors' in the
Prospectus which is a part of this Registration Statement.

DELOITTE & TOUCHE LLP
New York, N.Y.
March 12, 1998

<PAGE>
DEFINED ASSET FUNDS

MUNICIPAL INVESTMENT TRUST FUND
MUNICIPAL INSURED SERIES

INFORMATION SUPPLEMENT

This Information Supplement provides additional information concerning
the structure, operations and risks of municipal bond trusts (each, a
"Fund") of Defined Asset Funds not found in the prospectuses for the Funds.
This Information Supplement is not a prospectus and does not include all of
the information that a prospective investor should consider before
investing in a Fund. This Information Supplement should be read in
conjunction with the prospectus for the Fund in which an investor is
considering investing ("Prospectus"). Copies of the Prospectus can be
obtained by calling or writing the Trustee at the telephone number and
address indicated in Part A of the Prospectus.

This Information Supplement is dated March 12, 1998. Capitalized terms have
been defined in the Prospectus.

TABLE OF CONTENTS

Description of Fund Investments 3
Fund Structure 3
Portfolio Supervision 3
Risk Factors 5
Concentration 5
General Obligation Bonds 5
Moral Obligation Bonds 6
Refunded Bonds 6
Industrial Development Revenue Bonds 6
Municipal Revenue Bonds 7
Municipal Utility Bonds 7
Lease Rental Bonds 9
Housing Bonds 9
Hospital and Health Care Bonds 10
Facility Revenue Bonds 11
Solid Waste Disposal Bonds 12
Special Tax Bonds 12
Student Loan Revenue Bonds 12
Transit Authority Bonds 13
Municipal Water and Sewer Revenue Bonds 13
University and College Bonds 13
Puerto Rico 13
Bonds Backed by Letters of Credit or
Repurchase Commitments 14
Liquidity 17
Bonds Backed by Insurance 18
State Risk Factors 22
Payment of Bonds and Life of a Fund 22
Redemption 23
Tax Exemption 23
Income and Returns 24
Income 24

<PAGE>
State Matters 25
Alabama 25
Arizona 28
California 31
Colorado 41
Connecticut 44
Florida 46
Georgia 51
Illinois 53
Louisiana 54
Maine 56
Maryland 62
Massachusetts 67
Michigan 75
Minnesota 78
Mississippi 81
Missouri 83
New Jersey 85
New Mexico 86
New York 89
North Carolina 96
Ohio 101
Oregon 105
Pennsylvania 112
Tennessee 114
Texas 117
Virginia 122

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<PAGE>
DESCRIPTION OF FUND INVESTMENTS

Fund Structure

The Portfolio contains different issues of Bonds with fixed final
maturity or disposition dates. In addition up to 10% of the initial value
of the Portfolio may have consisted of units ("Other Fund Units") of
previously-issued Series of Municipal Investment Trust Fund ("Other Funds")
sponsored and underwritten by certain of the Sponsors and acquired by the
Sponsors in the secondary market. The Other Fund Units are not bonds as
such but represent interests in the securities, primarily state, municipal
and public authority bonds, in the portfolios of the Other Funds. See
Investment Summary in Part A for a summary of particular matters relating
to the Portfolio.

The portfolios underlying any Other Fund Units (the units of no one
Other Fund represented more than 5%, and all Other Fund Units represented
less than 10%, of the aggregate offering side evaluation of the Portfolio
on the Date of Deposit) are substantially similar to that of the Fund. The
percentage of the Portfolio, if any, represented by Other Fund Units on the
Evaluation Date is set forth under Investment Summary in Part A. On their
respective dates of deposit, the underlying bonds in any Other Funds were
rated BBB or better by Standard & Poor's or Baa or better by Moody's. While
certain of those bonds may not currently meet these criteria, they did not
represent more than 0.5% of the face amount of the Portfolio on the Date of
Deposit. Bonds in each Other Fund which do not mature according to their
terms within 10 years after the Date of Deposit had an aggregate bid side
evaluation of at least 40% of the initial face amount of the Other Fund.
The investment objectives of the Other Funds are similar to the investment
objective of the Fund, and the Sponsors, Trustee and Evaluator of the Other
Funds have responsibilities and authority paralleling in most important
respects those described in this Prospectus and receive similar fees. The
names of any Other Funds represented in the Portfolio and the number of
units of each Other Fund in the Fund may be obtained without charge by
writing to the Trustee.

Portfolio Supervision

Each Fund is a unit investment trust which follows a buy and hold
investment strategy. Traditional methods of investment management for
mutual funds typically involve frequent changes in fund holdings based on
economic, financial and market analyses. Because a Fund is not actively
managed, it may retain an issuer's securities despite financial or economic
developments adversely affecting the market value of the securities held by
a Fund. However, Defined Asset Funds' financial analysts regularly review a
Fund's Portfolio, and the Sponsors may instruct a Trustee to sell
securities in a Portfolio in the following circumstances: (i) default in
payment of amounts due on the security; (ii) institution of certain legal
proceedings; (iii) other legal questions or impediments affecting the
security or payments thereon; (iv) default under certain documents
adversely affecting debt service or in payments on other securities of the
same issuer or guarantor; (v) decline in projected income pledged for debt
service on a revenue bond; (vi) if a security becomes taxable or otherwise
inconsistent with a Fund's investment objectives; (vii) a right to sell or
redeem the security pursuant to a guarantee or other credit support; or
(viii) decline in security price or other market or credit factors
(including advance refunding) that, in the opinion of Defined Asset Funds
research, makes retention of the security detrimental to the interests of
Holders. If there is a payment default on any Bond and the Agent for the
Sponsors fails to instruct the Trustee within 30 days after notice of the
default, the Trustee will sell the Bond.

A Trustee must reject any offer by an issuer of a Bond to exchange
another security pursuant to a refunding or refinancing plan unless (a) the
Bond is in default or (b) in the written opinion of Defined Asset Funds
research analysts, a default is probable in the reasonably foreseeable
future, and the Sponsors instruct the Trustee to accept the offer or take
any other action with respect to the offer as the Sponsors consider
appropriate.

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Units offered in the secondary market may reflect redemptions or
prepayments, in whole or in part, or defaults on, certain of the Bonds
originally deposited in the Fund or the disposition of certain Bonds
originally deposited in the Fund to satisfy redemptions of Units (see
Redemption) or pursuant to the exercise by the Sponsors of their
supervisory role over the Fund (see Risk Factors -- Payment of the Bonds
and Life of the Fund). Accordingly, the face amount of Units may be less
than their original face amount at the time of the creation of the Fund. A
reduced value per Unit does not therefore mean that a Unit is necessarily
valued at a market discount; market discounts, as well as market premiums,
on Units are determined solely by a comparison of a Unit's outstanding face
amount and its evaluated price.

The Portfolio may contain debt obligations rated BBB by Standard &
Poor's and Baa by Moody's, which are the lowest "investment grade" ratings
assigned by the two rating agencies or debt obligations rated below
investment grade. The Portfolio may also contain debt obligations that have
received investment grade ratings from one agency but "junk Bond" ratings
from the other agency. In addition, the Portfolio may contain debt
obligations which are not rated by either agency but have in the opinion of
Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Agent for the
Sponsors, comparable credit characteristics to debt obligations rated near
or below investment grade. Investors should therefore be aware that these
debt obligations may have speculative characteristics and that changes in
economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments on these debt
obligations than is the case with higher rated bonds. Moreover, conditions
may develop with respect to any of the issuers of debt obligations in the
Portfolio which may cause the rating agencies to lower their ratings below
investment grade on a given security or cause the Agent for the Sponsors to
determine that the credit characteristics of a given security are
comparable to debt obligations rated below investment grade. As a result of
timing lags or a lack of current information, there can be no assurance
that the rating currently assigned to a given debt obligation by either
agency or the credit assessment of the Agent for the Sponsors actually
reflects all current information about the issuer of that debt obligation.

Subsequent to the Date of Deposit, a Debt Obligation or other
obligations of the issuer or guarantor or bank or other entity issuing a
letter of credit related thereto may cease to be rated, its rating may be
reduced or the credit assessment of the Agent for the Sponsors may change.
Because of the fixed nature of the Portfolio, none of these events require
an elimination of that Debt Obligation from the Portfolio, but the lowered
rating or changed credit assessment may be considered in the Sponsors'
determination to direct the disposal of the Debt Obligation (see
Administration of the Fund -- Portfolio Supervision).

Because ratings may be lowered or the credit assessment of the Agent
for the Sponsors may change, an investment in Units of the Trust should be
made with an understanding of the risks of investing in "junk bonds" (bonds
rated below investment grade or unrated bonds having similar credit
characteristics), including increased risk of loss of principal and
interest on the underlying debt obligations and the risk that the value of
the Units may decline with increases in interest rates. In recent years
there have been wide fluctuations in interest rates and thus in the value
of fixed-rate debt obligations generally. Debt obligations which are rated
below investment grade or unrated debt obligations having similar credit
characteristics are often subject to greater market fluctuations and risk
of loss of income and principal than securities rated investment grade, and
their value may decline precipitously in response to rising interest rates.
This effect is so not only because increased interest rates generally lead
to decreased values for fixed-rate instruments, but also because increased
interest rates may indicate a slowdown in the economy generally, which
could result in defaults by less creditworthy issuers. Because investors
generally perceive that there are greater risks associated with lower-rated
securities, the yields and prices of these securities tend to fluctuate
more than higher-rated securities with changes in the perceived credit
quality of their issuers, whether these changes are short-term or
structural, and during periods of economic uncertainty. Moreover, issuers
whose obligations have been recently downgraded may be subject to claims by
debtholders and suppliers which, if sustained, would make it more difficult
for these issuers to meet payment obligations.

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Debt rated below investment grade or having similar credit characteristics
also tends to be more thinly traded than investment-grade debt and held
primarily by institutions, and this lack of liquidity can negatively affect
the value of the debt. Debt which is not rated investment grade or having
similar credit characteristics may be subordinated to other obligations of
the issuer. Senior debtholders would be entitled to receive payment in full
before subordinated debtholders receive any payment at all in the event of
a bankruptcy or reorganization. Lower rated debt obligations and debt
obligations having similar credit characteristics may also present payment-
expectation risks. For example, these bonds may contain call or redemption
provisions that would make it attractive for the issuers to redeem them in
periods of declining interest rates, and investors would therefore not be
able to take advantage of the higher yield offered.

The value of Units reflects the value of the underlying debt
obligations, including the value (if any) of any issues which are in
default. In the event of a default in payment of principal or interest, the
Trust may incur additional expenses in seeking payment under the defaulted
debt obligations. Because amounts recovered (if any) in respect of a
defaulted debt obligation may not be reflected in the value of Units until
actually received by the Trust, it is possible that a Holder who sells
Units would bear a portion of the expenses without receiving a portion of
the payments received. It is possible that new laws could be enacted which
could hurt the market for bonds which are not rated investment grade. For
example, federally regulated financial institutions could be required to
divest their holdings of these bonds, or proposals could be enacted which
might limit the use, or tax or other advantages, of these bonds.

RISK FACTORS

Concentration

A Portfolio may contain or be concentrated in one or more of the
types of Bonds discussed below. An investment in a Fund should be made with
an understanding of the risks that these bonds may entail, certain of which
are described below. Political restrictions on the ability to tax and
budgetary constraints affecting the state or local government may result in
reductions of, or delays in the payment of, state aid to cities, counties,
school districts and other local units of government which, in turn, may
strain the financial operations and have an adverse impact on the
creditworthiness of these entities. State agencies, colleges and
universities and health care organizations, with municipal debt
outstanding, may also be negatively impacted by reductions in state
appropriations.

General Obligation Bonds

General obligation bonds are backed by the issuer's pledge of its
full faith and credit and are secured by its taxing power for the payment
of principal and interest. However, the taxing power of any governmental
entity may be limited by provisions of state constitutions or laws and an
entity's credit will depend on many factors, including an erosion of the
tax base due to population declines, natural disasters, declines in the
state's industrial base or inability to attract new industries, economic
limits on the ability to tax without eroding the tax base and the extent to
which the entity relies on Federal or state aid, access to capital markets
or other factors beyond the entity's control.

Over time, many state and local governments may confront deficits due
to economic or other factors. In addition, a Portfolio may contain
obligations of issuers who rely in whole or in part on ad valorem real
property taxes as a source of revenue. Certain proposals, in the form of
state legislative proposals or voter initiatives, to limit ad valorem real
property taxes have been introduced in various states, and an amendment to
the constitution of the State of California, providing for strict
limitations on ad valorem real property taxes, has had a significant impact
on the taxing powers of local governments and on the financial condition of
school districts and local governments in California. It is not possible at
this time to predict the

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<PAGE>
final impact of such measures, or of similar future legislative or
constitutional measures, on school districts and local governments or on
their abilities to make future payments on their outstanding bonds.

Moral Obligation Bonds

The repayment of a "moral obligation" bond is only a moral
commitment, and not a legal obligation, of the state or municipality in
question. Even though the state may be called on to restore any deficits in
capital reserve funds of the agencies or authorities which issued the
bonds, any restoration generally requires appropriation by the state
legislature and accordingly does not constitute a legally enforceable
obligation or debt of the state. The agencies or authorities generally have
no taxing power.

Refunded Bonds

Refunded Bonds are typically secured by direct obligations of the
U.S. Government, or in some cases obligations guaranteed by the U.S.
Government, placed in an escrow account maintained by an independent
trustee until maturity or a predetermined redemption date. These bonds are
generally noncallable prior to maturity or the predetermined redemption
date. In a few isolated instances, however, bonds which were thought to be
escrowed to maturity have been called for redemption prior to maturity.

Industrial Development Revenue Bonds

Industrial Development Revenue Bonds, or "IDRs", including pollution
control revenue bonds, are tax-exempt bonds issued by states,
municipalities, public authorities or similar entities to finance the cost
of acquiring, constructing or improving various projects, including
pollution control facilities and certain manufacturing facilities. These
projects are usually operated by private corporations. IDRs are not general
obligations of governmental entities backed by their taxing power.
Municipal issuers are only obligated to pay amounts due on the IDRs to the
extent that funds are available from the unexpended proceeds of the IDRs or
from receipts or revenues under arrangements between the municipal issuer
and the corporate operator of the project. These arrangements may be in the
form of a lease, installment sale agreement, conditional sale agreement or
loan agreement, but in each case the payments to the issuer are designed to
be sufficient to meet the payments of amounts due on the IDRs.

IDRs are generally issued under bond resolutions, agreements or trust
indentures pursuant to which the revenues and receipts payable to the
issuer by the corporate operator of the project have been assigned and
pledged to the holders of the IDRs or a trustee for the benefit of the
holders of the IDRs. In certain cases, a mortgage on the underlying project
has been assigned to the holders of the IDRs or a trustee as additional
security for the IDRs. In addition, IDRs are frequently directly guaranteed
by the corporate operator of the project or by an affiliated company.
Regardless of the structure, payment of IDRs is solely dependent upon the
creditworthiness of the corporate operator of the project, corporate
guarantor and credit enhancer. Corporate operators or guarantors that are
industrial companies may be affected by many factors which may have an
adverse impact on the credit quality of the particular company or industry.
These include cyclicality of revenues and earnings, regulatory and
environmental restrictions, litigation resulting from accidents or
environmentally-caused illnesses, extensive competition (including that of
low-cost foreign companies), unfunded pension fund liabilities or
off-balance sheet items, and financial deterioration resulting from
leveraged buy-outs or takeovers. However, certain of the IDRs in the
Portfolio may be additionally insured or secured by letters of credit
issued by banks or otherwise guaranteed or secured to cover amounts due on
the IDRs in the event of a default in payment.

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Municipal Revenue Bonds

Municipal Utility Bonds. The ability of utilities to meet their
obligations under revenue bonds issued on their behalf is dependent on
various factors, including the rates they may charge their customers, the
demand for their services and the cost of providing those services.
Utilities, in particular investor-owned utilities, are subject to extensive
regulation relating to the rates which they may charge customers. Utilities
can experience regulatory, political and consumer resistance to rate
increases. Utilities engaged in long-term capital projects are especially
sensitive to regulatory lags in granting rate increases. Any difficulty in
obtaining timely and adequate rate increases could adversely affect a
utility's results of operations.

The demand for a utility's services is influenced by, among other
factors, competition, weather conditions and economic conditions. Electric
utilities, for example, have experienced increased competition as a result
of the availability of other energy sources, the effects of conservation on
the use of electricity, self-generation by industrial customers and the
generation of electricity by co-generators and other independent power
producers. Also, increased competition will result if federal regulators
determine that utilities must open their transmission lines to competitors.
Utilities which distribute natural gas also are subject to competition from
alternative fuels, including fuel oil, propane and coal.

The utility industry is an increasing cost business making the cost
of generating electricity more expensive and heightening its sensitivity to
regulation. A utility's costs are affected by its cost of capital, the
availability and cost of fuel and other factors. There can be no assurance
that a utility will be able to pass on these increased costs to customers
through increased rates. Utilities incur substantial capital expenditures
for plant and equipment. In the future they will also incur increasing
capital and operating expenses to comply with environmental legislation
such as the Clean Air Act of 1990, and other energy, licensing and other
laws and regulations relating to, among other things, air emissions, the
quality of drinking water, waste water discharge, solid and hazardous
substance handling and disposal, and citing and licensing of facilities.
Environmental legislation and regulations are changing rapidly and are the
subject of current public policy debate and legislative proposals. It is
increasingly likely that many utilities will be subject to more stringent
environmental standards in the future that could result in significant
capital expenditures. Future legislation and regulation could include,
among other things, regulation of so-called electromagnetic fields
associated with electric transmission and distribution lines as well as
emissions of carbon dioxide and other so-called greenhouse gases associated
with the burning of fossil fuels. Compliance with these requirements may
limit a utility's operations or require substantial investments in new
equipment and, as a result, may adversely affect a utility's results of
operations.

The electric utility industry in general is subject to various
external factors including (a) the effects of inflation upon the costs of
operation and construction, (b) substantially increased capital outlays and
longer construction periods for larger and more complex new generating
units, (c) uncertainties in predicting future load requirements, (d)
increased financing requirements coupled with limited availability of
capital, (e) exposure to cancellation and penalty charges on new generating
units under construction, (f) problems of cost and availability of fuel,
(g) compliance with rapidly changing and complex environmental, safety and
licensing requirements, (h) litigation and proposed legislation designed to
delay or prevent construction of generating and other facilities, (i) the
uncertain effects of conservation on the use of electric energy, (j)
uncertainties associated with the development of a national energy policy,
(k) regulatory, political and consumer resistance to rate increases and (l)
increased competition as a result of the availability of other energy
sources. These factors may delay the construction and increase the cost of
new facilities, limit the use of, or necessitate costly modifications to,
existing facilities, impair the access of electric utilities to credit
markets, or substantially increase the cost of credit for electric
generating facilities.

The National Energy Policy Act ("NEPA"), which became law in October,
1992, makes it mandatory for a utility to permit non-utility generators of
electricity access to its transmission system for

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wholesale customers, thereby increasing competition for electric utilities.
NEPA also mandated demand-side management policies to be considered by
utilities. NEPA prohibits the Federal Energy Regulatory Commission from
mandating electric utilities to engage in retail wheeling, which is
competition among suppliers of electric generation to provide electricity
to retail customers (particularly industrial retail customers) of a
utility. However, under NEPA, a state can mandate retail wheeling under
certain conditions. California, Michigan, New Mexico and Ohio have
instituted investigations into the possible introduction of retail wheeling
within their respective states, which could foster competition among the
utilities. Retail wheeling might result in the issue of stranded investment
(investment in assets not being recovered in base rates), thus hampering a
utility's ability to meet its obligations.

There is concern by the public, the scientific community, and the
U.S. Congress regarding environmental damage resulting from the use of
fossil fuels. Congressional support for the increased regulation of air,
water, and soil contaminants is building and there are a number of pending
or recently enacted legislative proposals which may affect the electric
utility industry. In particular, on November 15, 1990, legislation was
signed into law that substantially revises the Clean Air Act (the "1990
Amendments"). The 1990 Amendments seek to improve the ambient air quality
throughout the United States by the year 2000. A main feature of the 1990
Amendments is the reduction of sulphur dioxide and nitrogen oxide emissions
caused by electric utility power plants, particularly those fueled by coal.
Under the 1990 Amendments the U.S. Environmental Protection Agency ("EPA")
must develop limits for nitrogen oxide emissions by 1993. The sulphur
dioxide reduction will be achieved in two phases. Phase I addresses
specific generating units named in the 1990 Amendments. In Phase II the
total U.S. emissions will be capped at 8.9 million tons by the year 2000.
The 1990 Amendments contain provisions for allocating allowances to power
plants based on historical or calculated levels. An allowance is defined as
the authorization to emit one ton of sulphur dioxide.

The 1990 Amendments also provide for possible further regulation of
toxic air emissions from electric generating units pending the results of
several federal government studies to be presented to Congress by the end
of 1995 with respect to anticipated hazards to public health, available
corrective technologies, and mercury toxicity.

Electric utilities which own or operate nuclear power plants are
exposed to risks inherent in the nuclear industry. These risks include
exposure to new requirements resulting from extensive federal and state
regulatory oversight, public controversy, decommissioning costs, and spent
fuel and radioactive waste disposal issues. While nuclear power
construction risks are no longer of paramount concern, the emerging issue
is radioactive waste disposal. In addition, nuclear plants typically
require substantial capital additions and modifications throughout their
operating lives to meet safety, environmental, operational and regulatory
requirements and to replace and upgrade various plant systems. The high
degree of regulatory monitoring and controls imposed on nuclear plants
could cause a plant to be out of service or on limited service for long
periods. When a nuclear facility owned by an investor-owned utility or a
state or local municipality is out of service or operating on a limited
service basis, the utility operator or its owners may be liable for the
recovery of replacement power costs. Risks of substantial liability also
arise from the operation of nuclear facilities and from the use, handling,
and possible radioactive emissions associated with nuclear fuel. Insurance
may not cover all types or amounts of loss which may be experienced in
connection with the ownership and operation of a nuclear plant and severe
financial consequences could result from a significant accident or
occurrence. The Nuclear Regulatory Commission has promulgated regulations
mandating the establishment of funded reserves to assure financial
capability for the eventual decommissioning of licensed nuclear facilities.
These funds are to be accrued from revenues in amounts currently estimated
to be sufficient to pay for decommissioning costs. Since there have been
very few nuclear plants decommissioned to date, these estimates may be
unrealistic.

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The ability of state and local joint action power agencies to make payments
on bonds they have issued is dependent in large part on payments made to
them pursuant to power supply or similar agreements. Courts in Washington,
Oregon and Idaho have held that certain agreements between the Washington
Public Power Supply System ("WPPSS") and the WPPSS participants are
unenforceable because the participants did not have the authority to enter
into the agreements. While these decisions are not specifically applicable
to agreements entered into by public entities in other states, they may
cause a reexamination of the legal structure and economic viability of
certain projects financed by joint action power agencies, which might
exacerbate some of the problems referred to above and possibly lead to
legal proceedings questioning the enforceability of agreements upon which
payment of these bonds may depend.

Lease Rental Bonds. Lease rental bonds are issued for the most part
by governmental authorities that have no taxing power or other means of
directly raising revenues. Rather, the authorities are financing vehicles
created solely for the construction of buildings (administrative offices,
convention centers and prisons, for example) or the purchase of equipment
(police cars and computer systems, for example) that will be used by a
state or local government (the "lessee"). Thus, the bonds are subject to
the ability and willingness of the lessee government to meet its lease
rental payments which include debt service on the bonds. Willingness to pay
may be subject to changes in the views of citizens and government officials
as to the essential nature of the finance project. Lease rental bonds are
subject, in almost all cases, to the annual appropriation risk, i.e., the
lessee government is not legally obligated to budget and appropriate for
the rental payments beyond the current fiscal year. These bonds are also
subject to the risk of abatement in many states--rental obligations cease
in the event that damage, destruction or condemnation of the project
prevents its use by the lessee. (In these cases, insurance provisions and
reserve funds designed to alleviate this risk become important credit
factors). In the event of default by the lessee government, there may be
significant legal and/or practical difficulties involved in the reletting
or sale of the project. Some of these issues, particularly those for
equipment purchase, contain the so-called "substitution safeguard", which
bars the lessee government, in the event it defaults on its rental
payments, from the purchase or use of similar equipment for a certain
period of time. This safeguard is designed to insure that the lessee
government will appropriate the necessary funds even though it is not
legally obligated to do so, but its legality remains untested in most, if
not all, states.

Housing Bonds. Multi-family housing revenue bonds and single family
mortgage revenue bonds are state and local housing issues that have been
issued to provide financing for various housing projects. Multi-family
housing revenue bonds are payable primarily from the revenues derived from
mortgage loans to housing projects for low to moderate income families.
Single-family mortgage revenue bonds are issued for the purpose of
acquiring from originating financial institutions notes secured by
mortgages on residences.

Housing bonds are not general obligations of the issuer although
certain obligations may be supported to some degree by Federal, state or
local housing subsidy programs. Budgetary constraints experienced by these
programs as well as the failure by a state or local housing issuer to
satisfy the qualifications required for coverage under these programs or
any legal or administrative determinations that the coverage of these
programs is not available to a housing issuer, probably will result in a
decrease or elimination of subsidies available for payment of amounts due
on the issuer's bonds. The ability of housing issuers to make debt service
payments on their bonds will also be affected by various economic and
non-economic developments including, among other things, the achievement
and maintenance of sufficient occupancy levels and adequate rental income
in multi-family projects, the rate of default on mortgage loans underlying
single family issues and the ability of mortgage insurers to pay claims,
employment and income conditions prevailing in local markets, increases in
construction costs, taxes, utility costs and other operating expenses, the
managerial ability of project managers, changes in laws and governmental
regulations and economic trends generally in the localities in which the
projects are situated. Occupancy of multi-family housing financial projects
may also be adversely affected by high rent levels and income limitations
imposed under Federal, state or local programs.

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All single family mortgage revenue bonds and certain multi-family housing
revenue bonds are prepayable over the life of the underlying mortgage or
mortgage pool, and therefore the average life of housing obligations cannot
be determined. However, the average life of these obligations will
ordinarily be less than their stated maturities. Single-family issues are
subject to mandatory redemption in whole or in part from prepayments on
underlying mortgage loans; mortgage loans are frequently partially or
completely prepaid prior to their final stated maturities as a result of
events such as declining interest rates, sale of the mortgaged premises,
default, condemnation or casualty loss. Multi-family issues are
characterized by mandatory redemption at par upon the occurrence of
monetary defaults or breaches of covenants by the project operator.
Additionally, housing obligations are generally subject to mandatory
partial redemption at par to the extent that proceeds from the sale of the
obligations are not allocated within a stated period (which may be within a
year of the date of issue).

The tax exemption for certain housing revenue bonds depends on
qualification under Section 143 of the Internal Revenue Code of 1986, as
amended (the "Code"), in the case of single family mortgage revenue bonds
or Section 142(a)(7) of the Code or other provisions of Federal law in the
case of certain multi-family housing revenue bonds (including Section 8
assisted bonds). These sections of the Code or other provisions of Federal
law contain certain ongoing requirements, including requirements relating
to the cost and location of the residences financed with the proceeds of
the single family mortgage revenue bonds and the income levels of tenants
of the rental projects financed with the proceeds of the multi-family
housing revenue bonds. While the issuers of the bonds and other parties,
including the originators and servicers of the single-family mortgages and
the owners of the rental projects financed with the multi-family housing
revenue bonds, generally covenant to meet these ongoing requirements and
generally agree to institute procedures designed to ensure that these
requirements are met, there can be no assurance that these ongoing
requirements will be consistently met. The failure to meet these
requirements could cause the interest on the bonds to become taxable,
possibly retroactively from the date of issuance, thereby reducing the
value of the bonds, subjecting Holders to unanticipated tax liabilities and
possibly requiring a Trustee to sell these bonds at reduced values.
Furthermore, any failure to meet these ongoing requirements might not
constitute an event of default under the applicable mortgage or permit the
holder to accelerate payment of the bond or require the issuer to redeem
the bond. In any event, where the mortgage is insured by the Federal
Housing Administration, its consent may be required before insurance
proceeds would become payable to redeem the mortgage bonds.

Hospital and Health Care Bonds. The ability of hospitals and other
health care facilities to meet their obligations with respect to revenue
bonds issued on their behalf is dependent on various factors, including the
level of payments received from private third-party payors and government
programs and the cost of providing health care services.

A significant portion of the revenues of hospitals and other health
care facilities is derived from private third-party payors and government
programs, including the Medicare and Medicaid programs. Both private
third-party payors and government programs have undertaken cost containment
measures designed to limit payments made to health care facilities.
Furthermore, government programs are subject to statutory and regulatory
changes, retroactive rate adjustments, administrative rulings and
government funding restrictions, all of which may materially decrease the
rate of program payments for health care facilities. Certain special
revenue obligations (i.e., Medicare or Medicaid revenues) may be payable
subject to appropriations by state legislatures. There can be no assurance
that payments under governmental programs will remain at levels comparable
to present levels or will, in the future, be sufficient to cover the costs
allocable to patients participating in these programs. In addition, there
can be no assurance that a particular hospital or other health care
facility will continue to meet the requirements for participation in these
programs.

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The costs of providing health care services are subject to increase as a
result of, among other factors, changes in medical technology and increased
labor costs. In addition, health care facility construction and operation
is subject to federal, state and local regulation relating to the adequacy
of medical care, equipment, personnel, operating policies and procedures,
rate-setting, and compliance with building codes and environmental laws.
Facilities are subject to periodic inspection by governmental and other
authorities to assure continued compliance with the various standards
necessary for licensing and accreditation. These regulatory requirements
are subject to change and, to comply, it may be necessary for a hospital or
other health care facility to incur substantial capital expenditures or
increased operating expenses to effect changes in its facilities,
equipment, personnel and services.

Hospitals and other health care facilities are subject to claims and
legal actions by patients and others in the ordinary course of business.
Although these claims are generally covered by insurance, there can be no
assurance that a claim will not exceed the insurance coverage of a health
care facility or that insurance coverage will be available to a facility.
In addition, a substantial increase in the cost of insurance could
adversely affect the results of operations of a hospital or other health
care facility. The Clinton Administration may impose regulations which
could limit price increases for hospitals or the level of reimbursements
for third-party payors or other measures to reduce health care costs and
make health care available to more individuals, which would reduce profits
for hospitals. Some states, such as New Jersey, have significantly changed
their reimbursement systems. If a hospital cannot adjust to the new system
by reducing expenses or raising rates, financial difficulties may arise.
Also, Blue Cross has denied reimbursement for some hospitals for services
other than emergency room services. The lost volume would reduce revenues
unless replacement patients were found.

Certain hospital bonds provide for redemption at par at any time upon
the sale by the issuer of the hospital facilities to a non-affiliated
entity, if the hospital becomes subject to ad valorem taxation, or in
various other circumstances. For example, certain hospitals may have the
right to call bonds at par if the hospital may be legally required because
of the bonds to perform procedures against specified religious principles
or to disclose information that is considered confidential or privileged.
Certain FHA-insured bonds may provide that all or a portion of those bonds,
otherwise callable at a premium, can be called at par in certain
circumstances. If a hospital defaults upon a bond, the realization of
Medicare and Medicaid receivables may be uncertain and, if the bond is
secured by the hospital facilities, legal restrictions on the ability to
foreclose upon the facilities and the limited alternative uses to which a
hospital can be put may severely reduce its collateral value.

The Internal Revenue Service is currently engaged in a program of
intensive audits of certain large tax-exempt hospital and health care
facility organizations. Although these audits have not yet been completed,
it has been reported that the tax-exempt status of some of these
organizations may be revoked.

Facility Revenue Bonds. Facility revenue bonds are generally payable
from and secured by the revenues from the ownership and operation of
particular facilities such as airports (including airport terminals and
maintenance facilities), bridges, marine terminals, turnpikes and port
authorities. For example, the major portion of gross airport operating
income is generally derived from fees received from signatory airlines
pursuant to use agreements which consist of annual payments for airport
use, occupancy of certain terminal space, facilities, service fees,
concessions and leases. Airport operating income may therefore be affected
by the ability of the airlines to meet their obligations under the use
agreements. The air transport industry is experiencing significant
variations in earnings and traffic, due to increased competition, excess
capacity, increased aviation fuel, deregulation, traffic constraints and
other factors. As a result, several airlines are experiencing severe
financial difficulties. Several airlines including America West Airlines
have sought protection from their creditors under Chapter 11 of the
Bankruptcy Code. In addition, other airlines such as Midway Airlines, Inc.,
Eastern Airlines, Inc. and Pan American Corporation have been liquidated.
However, Continental Airlines and Trans World Airlines have emerged from
bankruptcy. The Sponsors

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cannot predict what effect these industry conditions may have on airport
revenues which are dependent for payment on the financial condition of the
airlines and their usage of the particular airport facility. Furthermore,
proposed legislation would provide the U.S. Secretary of Transportation
with the temporary authority to freeze airport fees upon the occurrence of
disputes between a particular airport facility and the airlines utilizing
that facility.

Similarly, payment on bonds related to other facilities is dependent
on revenues from the projects, such as use fees from ports, tolls on
turnpikes and bridges and rents from buildings. Therefore, payment may be
adversely affected by reduction in revenues due to these factors and
increased cost of maintenance or decreased use of a facility, lower cost of
alternative modes of transportation or scarcity of fuel and reduction or
loss of rents.

Solid Waste Disposal Bonds. Bonds issued for solid waste disposal
facilities are generally payable from dumping fees and from revenues that
may be earned by the facility on the sale of electrical energy generated in
the combustion of waste products. The ability of solid waste disposal
facilities to meet their obligations depends upon the continued use of the
facility, the successful and efficient operation of the facility and, in
the case of waste-to-energy facilities, the continued ability of the
facility to generate electricity on a commercial basis. All of these
factors may be affected by a failure of municipalities to fully utilize the
facilities, an insufficient supply of waste for disposal due to economic or
population decline, rising construction and maintenance costs, any delays
in construction of facilities, lower-cost alternative modes of waste
processing and changes in environmental regulations. Because of the
relatively short history of this type of financing, there may be
technological risks involved in the satisfactory construction or operation
of the projects exceeding those associated with most municipal enterprise
projects. Increasing environmental regulation on the federal, state and
local level has a significant impact on waste disposal facilities. While
regulation requires more waste producers to use waste disposal facilities,
it also imposes significant costs on the facilities. These costs include
compliance with frequently changing and complex regulatory requirements,
the cost of obtaining construction and operating permits, the cost of
conforming to prescribed and changing equipment standards and required
methods of operation and, for incinerators or waste-to-energy facilities,
the cost of disposing of the waste residue that remains after the disposal
process in an environmentally safe manner. In addition, waste disposal
facilities frequently face substantial opposition by environmental groups
and officials to their location and operation, to the possible adverse
effects upon the public health and the environment that may be caused by
wastes disposed of at the facilities and to alleged improper operating
procedures. Waste disposal facilities benefit from laws which require waste
to be disposed of in a certain manner but any relaxation of these laws
could cause a decline in demand for the facilities' services. Finally,
waste-to-energy facilities are concerned with many of the same issues
facing utilities insofar as they derive revenues from the sale of energy to
local power utilities.

Special Tax Bonds. Special tax bonds are payable from and secured by
the revenues derived by a municipality from a particular tax such as a tax
on the rental of a hotel room, on the purchase of food and beverages, on
the rental of automobiles or on the consumption of liquor. Special tax
bonds are not secured by the general tax revenues of the municipality, and
they do not represent general obligations of the municipality. Therefore,
payment on special tax bonds may be adversely affected by a reduction in
revenues realized from the underlying special tax due to a general decline
in the local economy or population or due to a decline in the consumption,
use or cost of the goods and services that are subject to taxation. Also,
should spending on the particular goods or services that are subject to the
special tax decline, the municipality may be under no obligation to
increase the rate of the special tax to ensure that sufficient revenues are
raised from the shrinking taxable base.

Student Loan Revenue Bonds. Student loan revenue bonds are issued by
various authorities to finance the acquisition of student loan portfolios
or to originate new student loans. These bonds are typically secured by
pledged student loans, loan repayments and funds and accounts established
under the indenture.

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Student loans are generally either guaranteed by eligible guarantors under
the Higher Education Act of 1965, as amended, and reinsured by the
Secretary of the U.S. Department of Education, directly insured by the
federal government or financed as part of supplemental or alternative loan
programs with a state (e.g., loan repayment is not guaranteed).

Certain student loan revenue bonds may permit the issuer to enter
into an "interest rate swap agreement" with a counterparty obligating the
issuer to pay either a fixed or a floating rate on a notional principal
amount of bonds and obligating the counterparty to pay either a fixed or a
floating interest rate on the issuer's bonds. The payment obligations of
the issuer and the counterparty to each other will be netted on each
interest payment date, and only one payment will be made by one party to
the other. Although the choice of counterparty typically requires a
determination from a rating agency that any rating of the bonds will not be
adversely affected by the swap, payment on the bonds may be subject to the
additional risk of the counterparty's ability to fulfill its swap
obligation.

Transit Authority Bonds. Mass transit is generally not
self-supporting from fare revenues. Therefore, additional financial
resources must be made available to ensure operation of mass transit
systems as well as the timely payment of debt service. Often these
financial resources include Federal and state subsidies, lease rentals paid
by funds of the state or local government or a pledge of a special tax such
as a sales tax or a property tax. If fare revenues or the additional
financial resources do not increase appropriately to pay for rising
operating expenses, the ability of the issuer to adequately service the
debt may be adversely affected.

Municipal Water and Sewer Revenue Bonds. Water and sewer bonds are
generally payable from user fees. The ability of state and local water and
sewer authorities to meet their obligations may be affected by failure of
municipalities to utilize fully the facilities constructed by these
authorities, economic or population decline and resulting decline in
revenue from user charges, rising construction and maintenance costs and
delays in construction of facilities, impact of environmental requirements,
failure or inability to raise user charges in response to increased costs,
the difficulty of obtaining or discovering new supplies of fresh water, the
effect of conservation programs and the impact of "no growth" zoning
ordinances. In some cases this ability may be affected by the continued
availability of Federal and state financial assistance and of municipal
bond insurance for future bond issues.

University and College Bonds. The ability of universities and
colleges to meet their obligations is dependent upon various factors,
including the size and diversity of their sources of revenues, enrollment,
reputation, management expertise, the availability and restrictions on the
use of endowments and other funds, the quality and maintenance costs of
campus facilities, and, in the case of public institutions, the financial
condition of the relevant state or other governmental entity and its
policies with respect to education. The institution's ability to maintain
enrollment levels will depend on such factors as tuition costs, demographic
trends, geographic location, geographic diversity and quality of the
student body, quality of the faculty and the diversity of program
offerings.

Legislative or regulatory action in the future at the Federal, state
or local level may directly or indirectly affect eligibility standards or
reduce or eliminate the availability of funds for certain types of student
loans or grant programs, including student aid, research grants and
work-study programs, and may affect indirect assistance for education.

Puerto Rico

Various Bonds may be affected by general economic conditions in
Puerto Rico. Puerto Rico's unemployment rate remains significantly higher
than the U.S. unemployment rate. Furthermore, the Puerto

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<PAGE>
Rican economy is largely dependent for its development upon U.S. policies
and programs that are being reviewed and may be eliminated.

The Puerto Rican economy is affected by a number of Commonwealth and
Federal investment incentive programs. For example, Section 936 of the Code
provides for a credit against Federal income taxes for U.S. companies
operating on the island if certain requirements are met. The Omnibus Budget
Reconciliation Act of 1993 imposes limits on this credit, effective for tax
years beginning after 1993. In addition, from time to time proposals are
introduced in Congress which, if enacted into law, would eliminate some or
all of the benefits of Section 936. Although no assessment can be made at
this time of the precise effect of this limitation, it is expected that the
limitation of Section 936 credits would have a negative impact on Puerto
Rico's economy.

Aid for Puerto Rico's economy has traditionally depended heavily on
Federal programs, and current Federal budgetary policies suggest that an
expansion of aid to Puerto Rico is unlikely. An adverse effect on the
Puerto Rican economy could result from other U.S. policies, including a
reduction of tax benefits for distilled products, further reduction in
transfer payment programs such as food stamps, curtailment of military
spending and policies which could lead to a stronger dollar.

In a plebiscite held in November, 1993, the Puerto Rican electorate
chose to continue Puerto Rico's Commonwealth status. Previously proposed
legislation, which was not enacted, would have preserved the federal tax
exempt status of the outstanding debts of Puerto Rico and its public
corporations regardless of the outcome of the referendum, to the extent
that similar obligations issued by states are so treated and subject to the
provisions of the Code currently in effect. There can be no assurance that
any pending or future legislation finally enacted will include the same or
similar protection against loss of tax exemption. The November 1993
plebiscite can be expected to have both direct and indirect consequences on
such matters as the basic characteristics of future Puerto Rico debt
obligations, the markets for these obligations, and the types, levels and
quality of revenue sources pledged for the payment of existing and future
debt obligations. The possible consequences include legislative proposals
seeking restoration of the status of Section 936 benefits otherwise subject
to the limitations discussed above. However, no assessment can be made at
this time of the economic and other effects of a change in federal laws
affecting Puerto Rico as a result of the November 1993 plebiscite.

Bonds Backed by Letters of Credit or Repurchase Commitments

In the case of Bonds secured by letters of credit issued by
commercial banks or savings banks, savings and loan associations and
similar institutions ("thrifts"), the letter of credit may be drawn upon,
and the Bonds consequently redeemed, if an issuer fails to pay amounts due
on the Bonds or defaults under its reimbursement agreement with the issuer
of the letter of credit or, in certain cases, if the interest on the Bonds
is deemed to be taxable and full payment of amounts due is not made by the
issuer. The letters of credit are irrevocable obligations of the issuing
institutions, which are subject to extensive governmental regulations which
may limit both the amounts and types of loans and other financial
commitments which may be made and interest rates and fees which may be
charged.

Certain Intermediate Term and Put Series and certain other Series
contain Bonds purchased from one or more commercial banks or thrifts or
other institutions ("Sellers") which have committed under certain
circumstances specified below to repurchase the Bonds from the Fund
("Repurchase Commitments"). The Bonds in these Funds may be secured by one
or more Repurchase Commitments (see Investment Summary in Part A) which, in
turn may be backed by a letter of credit or secured by a security interest
in collateral. A Seller may have committed to repurchase from the Fund any
Bonds sold by it, within a specified period after receiving notice from the
Trustee, to the extent necessary to satisfy redemptions of Units despite
the market-making activity of the Sponsors (a "Liquidity Repurchase"). The
required notice period may be 14

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<PAGE>
days (a "14 Day Repurchase") or, if a repurchase date is set forth under
Investment Summary in Part A, the Trustee may at any time not later than
two hours after the Evaluation Time on the repurchase date (or if a
repurchase date is not a business day, on the first business day
thereafter), deliver this notice to the Seller. Additionally, if the
Sponsors elect to remarket Units which have been received at or before the
Evaluation Time on any repurchase date (the "Tendered Units"), a Seller may
have committed to repurchase from the Fund on the date 15 business days
after that repurchase date, any Bonds sold by the Seller to the Fund in
order to satisfy any tenders for redemption by the Sponsors made within 10
business days after the Evaluation Time. A Seller may also have made any of
the following commitments: (i) to repurchase at any time on 14 calendar
days' notice any Bonds if the issuer thereof shall fail to make any
payments of principal thereof and premium and interest thereon (a "Default
Repurchase"); (ii) to repurchase any Bond on a fixed disposition date (a
"Disposition Date") if the Trustee elects not to sell the Bond in the open
market (because a price in excess of its Put Price (as defined under
Investment Summary in Part A) cannot be obtained) on this date (a
"Disposition Repurchase")); (iii) to repurchase at any time on 14 calendar
days' notice any Bond in the event that the interest thereon should be
deemed to be taxable (a "Tax Repurchase"); and (iv) to repurchase
immediately all Bonds if the Seller becomes or is deemed to be bankrupt or
insolvent (an "Insolvency Repurchase"). (See Investment Summary in Part A.)
Any repurchase of a Bond will be at a price no lower than its original
purchase price to the Fund, plus accrued interest to the date of
repurchase, plus any further adjustments as described under Investment
Summary in Part A.

Upon the sale of a Bond by the Fund to a third party prior to its
Disposition date, any related Liquidity and Disposition Repurchase
commitments will be transferable, together with an interest in any
collateral or letter of credit backing the repurchase commitments and the
Liquidity Repurchase commitments will be exercisable by the buyer free from
the restriction that the annual repurchase right may only be exercised to
meet redemptions of Units. Any Default Repurchase, Tax Repurchase and
Insolvency Repurchase commitments also will not terminate upon disposition
of the Bond by the Fund but will be transferable, together with an interest
in the collateral or letter of credit backing the Repurchase Commitments or
both, as the case may be.

A Seller's Repurchase Commitments apply only to Bonds which it has
sold to the Fund; consequently, if a particular Seller fails to meet its
commitments, no recourse is available against any other Seller nor against
the collateral or letters of credit of any other Seller. Each Seller's
Repurchase Commitments relating to any Bond terminate (i) upon repurchase
by the Seller of the Bond, (ii) on the Disposition Date of the Bond if its
holder does not elect to have the Seller repurchase the Bond on that date
and (iii) in the event notice of redemption shall have been given on or
prior to the Disposition Date for the entire outstanding principal amount
of the Bond and that redemption or maturity of the Bond occurs on or prior
to the Disposition Date. On the scheduled Disposition Date of a Bond the
Trustee will sell that Bond in the open market if a price in excess of the
Put Price as of the Disposition Date can be obtained.

An investment in Units of a Fund containing any of these types of
credit-supported Bonds should be made with an understanding of the
characteristics of the commercial banking and thrift industries and of the
risks which an investment in Units may entail. Banks and thrifts are
subject to extensive governmental regulations which may limit both the
amounts and types of loans and other financial commitments which may be
made and interest rates and fees which may be charged. The profitability of
these industries is largely dependent upon the availability and cost of
funds for the purpose of financing lending operations under prevailing
money market conditions. Also, general economic conditions play an
important part in the operations of this industry and exposure to credit
losses arising from possible financial difficulties of borrowers might
affect an institution's ability to meet its obligations. These factors also
affect bank holding companies and other financial institutions, which may
not be as highly regulated as banks, and may be more able to expand into
other non-financial and non-traditional businesses.

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<PAGE>
In December 1991 Congress passed and the President signed into law the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
and the Resolution Trust Corporation Refinancing, Restructuring, and
Improvement Act of 1991. Those laws imposed many new limitations on the way
in which banks, savings banks, and thrifts may conduct their business and
mandated early and aggressive regulatory intervention for unhealthy
institutions.

The thrift industry has experienced severe strains as demonstrated by
the failure of numerous savings banks and savings and loan associations.
One consequence of this was the insolvency of the deposit insurance fund of
the Federal Savings and Loan Insurance Corporation ("FSLIC"). As a result,
in 1989 Congress enacted the Financial Institutions Reform, Recovery and
Enforcement Act ("FIRREA") which significantly altered the legal rules and
regulations governing banks and thrifts. Among other things, FIRREA
abolished the FSLIC and created a new agency, the Resolution Trust
Corporation ("RTC"), investing it with certain of the FSLIC's powers. The
balance of the FSLIC's powers were transferred to the Federal Deposit
Insurance Corporation ("FDIC"). Under FIRREA, as subsequently amended, the
RTC is normally appointed as receiver or conservator of thrifts that fail
between January 1, 1989 and a date that may occur as late as July 1, 1995
if their deposits, prior to FIRREA, were insured by the FSLIC. The FDIC is
normally appointed as receiver or conservator for all thrifts the deposits
of which, before FIRREA, were insured by the FDIC, and those thrifts the
deposits of which, prior to FIRREA, were insured by the FSLIC that fail on
or after the end of the RTC appointment period.

In certain cases, the Sponsors have agreed that the sole recourse in
connection with any default, including insolvency, by thrifts whose
collateralized letter of credit, guarantee or Repurchase Commitments may
back any of the Debt Obligations will be to exercise available remedies
with respect to the collateral pledged by the thrift; should the collateral
be insufficient, the Fund will, therefore, be unable to pursue any default
judgment against that thrift. Certain of these collateralized letters of
credit, guarantees or Repurchase Commitments may provide that they are to
be called upon in the event the thrift becomes or is deemed to be
insolvent. Accordingly, investors should recognize that they are subject to
having the principal amount of their investment represented by a Debt
Obligation secured by a collateralized letter of credit, guarantee or
Repurchase Commitment returned prior to the termination date of the Fund or
the maturity or disposition dates of the Debt Obligations if the thrift
becomes or is deemed to be insolvent, as well as in any of the situations
outlined under Repurchase Commitments below.

Moreover, FIRREA generally permits the FDIC or the RTC, as the case
may be, to prevent the exercise of a Seller's Insolvency Repurchase
commitment and empowers that agency to repudiate a Seller's contracts,
including a Seller's other Repurchase Commitments. FIRREA also creates a
risk that damages against the FDIC or RTC would be limited and that
investors could be left without the full protections afforded by the
Repurchase Commitments and the Collateral. Policy statements adopted by the
FDIC and the RTC concerning collateralized repurchase commitments have
partially ameliorated these risks for the Funds. According to these policy
statements, the FDIC or the RTC, as conservator or receiver, will not
assert the position that it can repudiate the repurchase commitments
without the payment of damages from the collateral, and will instead either
(i) accelerate the collateralized repurchase commitments, in which event
payment will be made under the repurchase commitments to the extent of
available collateral, or (ii) enforce the repurchase commitments, except
that any insolvency clause would not be enforceable against the FDIC and
the RTC. Should the FDIC choose to accelerate, however, there is some
question whether the payment made would include interest on the defaulted
Debt Obligations for the period after the appointment of the receiver or
conservator through the payment date.

The RTC has also given similar comfort with respect to collateralized
letters of credit, but the FDIC has not done so at this time. Consequently,
there can be no assurance that collateralized letters of credit issued by
thrifts for which the FDIC would be the receiver or conservator appointed,
as described three paragraphs earlier, will be available in the event of
the failure of any such thrift.

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<PAGE>
The possibility of early payment has been increased significantly by the
enactment of FDICIA, which requires federal regulators of insured banks,
savings banks and thrifts to act more quickly to address the problems of
undercapitalized institutions than previously, and specifies in more detail
the actions they must take. One requirement virtually compels the
appointment of a receiver for any institution when its ratio of tangible
equity to total assets declines to two percent. Others force aggressive
intervention in the business of an institution at even earlier stages of
deterioration. Upon appointment of a receiver, if the FDIC or RTC pays as
provided, in the policy statements and notwithstanding the possibility that
the institution might not have deteriorated to zero book net worth (and
therefore might not satisfy traditional definitions of "insolvent"), the
payment could therefore come substantially earlier than might have been the
case prior to FDICIA.

Certain letters of credit or guarantees backing Bonds may have been
issued by a foreign bank or corporation or similar entity (a "Foreign
Guarantee"). Foreign Guarantees are subject to the risk that exchange
control regulations might be adopted in the future which might affect
adversely payments to the Fund. Similarly, foreign withholding taxes could
be imposed in the future although provision is made in the instruments
governing any Foreign Guarantee that, in substance, to the extent permitted
by applicable law, additional payments will be made by the guarantor so
that the total amount paid, after deduction of any applicable tax, will not
be less than the amount then due and payable on the Foreign Guarantee. The
adoption of exchange control regulations and other legal restrictions could
have an adverse impact on the marketability of any Bonds backed by a
Foreign Guarantee.

Liquidity

Certain of the Bonds may have been purchased by the Sponsors from
various banks and thrifts in large denominations and may not have been
issued under bond resolutions or trust indentures providing for issuance of
bonds in small denominations. These Bonds were generally directly placed
with the banks or thrifts and held in their portfolios prior to sale to the
Sponsors. There is no established secondary market for those Bonds. The
Sponsors believe that there should be a readily available market among
institutional investors for the Bonds which were purchased from these
portfolios in the event it is necessary to sell Bonds to meet redemptions
of Units (should redemptions be made despite the market making activity of
the Sponsors) in light of the following considerations: (i) the credit
characteristics of the companies obligated to make payments on the Bonds;
(ii) the fact that these Bonds may be backed by irrevocable letters of
credit or guarantees of banks or thrifts; and (iii) the fact that banks or
thrifts selling these Bonds to the Sponsors for deposit in the Fund or the
placement agent acting in connection with their sale generally have stated
their intentions, although they are not legally obligated to do so, to
remarket or to repurchase, at the then-current bid side evaluation, any of
these Bonds proposed to be sold by the Trustee. The interest on these Bonds
received by the Fund is net of the fee for the related letter of credit or
guarantee charged by the bank or thrift issuing the letter of credit or
guarantee.

Any Bonds which were purchased from these portfolios are exempt from
the registration provisions of the Federal securities laws, and, therefore,
can be sold free of the registration requirements of the securities laws.
Because there is no established secondary market for these Bonds, however,
there is no assurance that the price realized on sale of these Bonds will
not be adversely affected. Consequently it is more likely that the sale of
these Bonds may cause a decline in the value of Units than a sale of debt
obligations for which an established secondary market exists. In addition,
in certain Intermediate Term and Put Series and certain other Series,
liquidity of the Fund is additionally augmented by the Sellers'
collateralized or letter of credit-backed Liquidity Repurchase commitment
in the event it is necessary to sell any Bond to meet redemptions of Units.
If, upon the scheduled Disposition Date for any Bond, the Trustee elects
not to sell the Bond scheduled for disposition on this date in the open
market (because, for example, a price in excess of its Put Price cannot be
obtained), the Seller of the Bond is obligated to repurchase the Bond
pursuant to its collateralized or letter of credit-backed Disposition
Repurchase commitment. There can

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<PAGE>
be no assurance that the prices that can be obtained for the Bonds at any
time in the open market will exceed the Put Price of the Bonds. In
addition, if any Seller should become unable to honor its repurchase
commitments and the Trustee is consequently forced to sell the Bonds in the
open market, there is no assurance that the price realized on this sale of
the Bonds would not be adversely affected by the absence of an established
secondary market for certain of the Bonds.

In some cases, the Sponsors have entered into an arrangement with the
Trustee whereby certain of the Bonds may be transferred to a trust (a
"Participation Trust") in exchange for certificates of participation in the
Participation Trust which could be sold in order to meet redemptions of
Units. The certificates of participation would be issued in readily
marketable denominations of $5,000 each or any greater multiple thereof and
the holder thereof would be fully entitled to the repayment protections
afforded by collateral arrangements to any holder of the underlying Bonds.
These certificates would be exempt from registration under the Securities
Act of 1933 pursuant to Section 3(a)(2) thereof.

For Bonds that have been guaranteed or similarly secured by insurance
companies or other corporations or entities, the guarantee or similar
commitment may constitute a security (a "Restricted Security") that cannot,
in the opinion of counsel, be sold publicly by the Trustee without
registration under the Securities Act of 1933, as amended, or similar
provisions of law subsequently exacted. The Sponsors nevertheless believe
that, should a sale of these Bonds be necessary in order to meet
redemptions, the Trustee should be able to consummate a sale with
institutional investors. Up to 40% of the Portfolio may initially have
consisted of Bonds purchased from various banks and thrifts and other Bonds
with guarantees which may constitute Restricted Securities.

The Fund may contain bonds purchased directly from issuers. These
Bonds are generally issued under bond resolutions or trust indentures
providing for the issuance of bonds in publicly saleable denominations
(usually $5,000), may be sold free of the registration requirements of the
Securities Act of 1933 and are otherwise structured in contemplation of
ready marketability. In addition, the Sponsors generally have obtained
letters of intention to repurchase or to use best efforts to remarket these
Debt Obligations from the issuers, the placement agents acting in
connection with their sale or the entities providing the additional credit
support, if any. These letters do not express legal obligations; however,
in the opinion of the Sponsors, these Bonds should be readily marketable.

Bonds Backed by Insurance

Municipal bond insurance may be provided by one or more of AMBAC
Indemnity Corporation ("AMBAC"), Asset Guaranty Reinsurance Co. ("Asset
Guaranty"), Capital Guaranty Insurance Company ("CGIC"), Capital Markets
Assurance Corp. ("CAPMAC"), Connie Lee Insurance Company ("Connie Lee"),
Continental Casualty Company ("Continental"), Financial Guaranty Insurance
Company ("Financial Guaranty"), Financial Security Assurance Inc. ("FSA"),
Firemen's Insurance Company of Newark, New Jersey ("Firemen's"), Industrial
Indemnity Insurance Company ("IIC"), which operates the Health Industry
Bond Insurance ("HIBI") Program or Municipal Bond Investors Insurance
Corporation ("MBIA") (collectively, the "Insurance Companies"). The
claims-paying ability of each of these companies, unless otherwise
indicated, is rated AAA by Standard & Poor's or another acceptable national
rating agency. The ratings are subject to change at any time at the
discretion of the rating agencies. In determining whether to insure bonds,
the Insurance Companies severally apply their own standards. The cost of
this insurance is borne either by the issuers or previous owners of the
bonds or by the Sponsors. The insurance policies are non-cancelable and
will continue in force so long as the insured Bonds are outstanding and the
insurers remain in business. The insurance policies guarantee the timely
payment of principal and interest on but do not guarantee the market value
of the insured Bonds or the value of the Units. The insurance policies
generally do not provide for accelerated payments of principal or cover
redemptions resulting from events of taxability. If the issuer of any
insured Bond should fail to make an interest or principal payment, the

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insurance policies generally provide that a Trustee or its agent will give
notice of nonpayment to the Insurance Company or its agent and provide
evidence of the Trustee's right to receive payment. The Insurance Company
is then required to disburse the amount of the failed payment to the
Trustee or its agent and is thereafter subrogated to the Trustee's right to
receive payment from the issuer.

Financial information relating to the Insurance Companies has been
obtained from publicly available information. No representation is made as
to the accuracy or adequacy of the information or as to the absence of
material adverse changes since the information was made available to the
public. Standard & Poor's has rated the Units of any Insured Fund AAA
because the Insurance Companies have insured the Bonds. The assignment of a
AAA rating is due to Standard & Poor's assessment of the creditworthiness
of the Insurance Companies and of their ability to pay claims on their
policies of insurance. In the event that Standard & Poor's reassesses the
creditworthiness of any Insurance Company which would result in the rating
of an Insured Fund being reduced, the Sponsors are authorized to direct the
Trustee to obtain other insurance.

Certain Bonds may be entitled to portfolio insurance ("Portfolio
Insurance") that guarantees the scheduled payment of the principal of and
interest on those Bonds ("Portfolio-Insured Bonds") while they are retained
in the Fund. Since the Portfolio Insurance applies to Bonds only while they
are retained in the Fund, the value of Portfolio-Insured Bonds (and hence
the value of the Units) may decline if the credit quality of any Portfolio-
Insured Bonds is reduced. Premiums for Portfolio Insurance are payable
monthly in advance by the Trustee on behalf of the Fund.

As Portfolio-Insured Bonds are redeemed by their respective issuers
or are sold by the Trustee, the amount of the premium payable for the
Portfolio Insurance will be correspondingly reduced. Nonpayment of premiums
on any policy obtained by the Fund will not result in the cancellation of
insurance but will permit the portfolio insurer to take action against the
Trustee to recover premium payments due it. Upon the sale of a Portfolio-
Insured Bond from the Fund, the Trustee has the right, pursuant to an
irrevocable commitment obtained from the portfolio insurer, to obtain
insurance to maturity ("Permanent Insurance") on the Bond upon the payment
of a single predetermined insurance premium from the proceeds of the sale.
It is expected that the Trustee will exercise the right to obtain Permanent
Insurance only if the Fund would receive net proceeds from the sale of the
Bond (sale proceeds less the insurance premium attributable to the
Permanent Insurance) in excess of the sale proceeds that would be received
if the Bonds were sold on an uninsured basis. The premiums for Permanent
Insurance for each Portfolio-Insured Bond will decline over the life of the
Bond.

The Public Offering Price does not reflect any element of value for
Portfolio Insurance. The Evaluator will attribute a value to the Portfolio
Insurance (including the right to obtain Permanent Insurance) for the
purpose of computing the price or redemption value of Units only if the
Portfolio-Insured Bonds are in default in payment of principal or interest
or, in the opinion of the Agent for the Sponsors, in significant risk of
default. In making this determination the Agent for the Sponsors has
established as a general standard that a Portfolio-Insured Bond which is
rated less than BB by Standard & Poor's or Ba by Moody's will be deemed in
significant risk of default although the Agent for the Sponsors retains the
discretion to conclude that a Portfolio-Insured Bond is in significant risk
of default even though at the time it has a higher rating, or not to reach
that conclusion even if it has a lower rating. The value of the insurance
will be equal to the difference between (i) the market value of the
Portfolio-Insured Bond assuming the exercise of the right to obtain
Permanent Insurance (less the insurance premium attributable to the
purchase of Permanent Insurance) and (ii) the market value of the Portfolio-
Insured Bond not covered by Permanent Insurance.

In addition, certain Funds may contain Bonds that are insured to
maturity as well as being Portfolio-Insured Bonds.

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<PAGE>
The following are brief descriptions of the Insurance Companies. The
financial information presented for each company has been determined on a
statutory basis and is unaudited.

AMBAC is a Wisconsin-domiciled stock insurance company, regulated by
the Insurance Department of the State of Wisconsin, and licensed to do
business in various states. AMBAC is a wholly-owned subsidiary of AMBAC
Inc., a financial holding company which is publicly owned following a
complete divestiture by Citibank during the first quarter of 1992.

Asset Guaranty is a New York State insurance company licensed to
write financial guarantee, credit, residual value and surety insurance.
Asset Guaranty commenced operations in mid-1988 by providing reinsurance to
several major monoline insurers. The parent holding company of Asset
Guaranty, Asset Guarantee Inc. (AGI), merged with Enhance Financial
Services (EFS) in June, 1990 to form Enhance Financial Services Group Inc.
(EFSG). The two main, 100%-owned subsidiaries of EFSG, Asset Guaranty and
Enhance Reinsurance Company (ERC), share common management and physical
resources. After an initial public offering completed in February 1992 and
the sale by Merrill Lynch & Co. of its state, EFSG is 49.8%-owned by the
public, 29.9% by US West Financial Services, 14.1% by Manufacturers Life
Insurance Co. and 6.2% by senior management. Both ERC and Asset Guaranty
are rated "AAA" for claims paying ability by Duff & Phelps, and ERC is
rated triple-A for claims-paying-ability for both S&P and Moody's. Asset
Guaranty received a "AA" claims-paying-ability rating from S&P during
August 1993, but remains unrated by Moody's.

CGIC, a monoline bond insurer headquartered in San Francisco,
California, was established in November 1986 to assume the financial
guaranty business of United States Fidelity and Guaranty Company ("USF&G").
It is a wholly-owned subsidiary of Capital Guaranty Corporation ("CGC")
whose stock is owned by: Constellation Investments, Inc., an affiliate of
Baltimore Gas & Electric, Fleet/Norstar Financial Group, Inc., Safeco
Corporation, Sibag Finance Corporation, an affiliate of Siemens AG, USF&G,
the eighth largest property/casualty company in the U.S. as measured by net
premiums written, and CGC management.

CAPMAC commenced operations in December 1987, as the second mono-line
financial guaranty insurance company (after FSA) organized solely to insure
non-municipal obligations. CAPMAC, a New York corporation, is a
wholly-owned subsidiary of CAPMAC Holdings, Inc. (CHI), which was sold in
1992 by Citibank (New York State) to a group of 12 investors led by the
following: Dillon Read's Saratoga Partners II, L.P., an acquisition fund;
Caprock Management, Inc., representing Rockefeller family interests;
Citigrowth Fund, a Citicorp venture capital group; and CAPMAC senior
management and staff. These groups control approximately 70% of the stock
of CHI. CAPMAC had traditionally specialized in guaranteeing consumer loan
and trade receivable asset-backed securities. Under the new ownership group
CAPMAC intends to become involved in the municipal bond insurance business,
as well as their traditional non-municipal business.

Connie Lee is a wholly owned subsidiary of College Construction Loan
Insurance Association ("CCLIA"), a government-sponsored enterprise
established by Congress to provide American academic institutions with
greater access to low-cost capital through credit enhancement. Connie Lee,
the operating insurance company, was incorporated in 1987 and began
business as a reinsurer of tax-exempt bonds of colleges, universities, and
teaching hospitals with a concentration on the hospital sector. During the
fourth quarter of 1991 Connie Lee began underwriting primary bond insurance
which will focus largely on the college and university sector. CCLIA's
founding shareholders are the U.S. Department of Education, which owns 14%
of CCLIA, and the Student Loan Marketing Association ("Sallie Mae"), which
owns 36%. The other principal owners are: Pennsylvania Public School
Employees' Retirement System, Metropolitan Life Insurance Company, Kemper
Financial Services, Johnson family funds and trusts, Northwestern
University, Rockefeller & Co., Inc. administered trusts and funds, and
Stanford University. Connie Lee is domiciled in the state of Wisconsin and
has licenses to do business in 47 states and the District of Columbia.

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<PAGE>
Continental is a wholly-owned subsidiary of CNA Financial Corp. and was
incorporated under the laws of Illinois in 1948. Continental is the lead
property-casualty company of a fleet of carriers nationally known as "CNA
Insurance Companies". CNA is rated AA+ by Standard & Poor's.

Financial Guaranty Insurance Company ("Financial Guaranty") is a
wholly-owned subsidiary of FGIC Corporation ("Corporation"), a Delaware
holding company. The Corporation is a wholly-owned subsidiary of General
Electric Capital Corporation ("GECC"). Neither the Corporation nor GECC is
obligated to pay the debts of or the claims against Financial Guaranty.
Financial Guaranty is domiciled in the State of New York and is subject to
regulation by the State of New York Insurance Department. As of June 30,
1997, the total capital and surplus of Financial Guaranty was approximately
$1,164,694,536. Copies of Financial Guaranty's financial statements,
prepared on the basis of statutory accounting principles, and the
Corporation's financial statements, prepared on the basis of generally
accepted accounting principles, may be obtained by writing to Financial
Guaranty at 115 Broadway, New York, New York 10006, Attention:
Communications Department [telephone number is (212) 312-3000] or to the
New York State Insurance Department at 160 West Broadway, 18th Floor, New
York, New York 10013, Attention: Financial Condition Property/Casualty
Bureau [telephone number: (212) 621-0389].

In addition, Financial Guaranty is currently licensed to write
insurance in all 50 states and the District of Columbia.

FSA is a monoline property and casualty insurance company
incorporated in New York in 1984. It is a wholly-owned subsidiary of
Financial Security Assurance Holdings Ltd., which was acquired in December
1989 by US West, Inc., the regional Bell Telephone Company serving the
Rocky Mountain and Pacific Northwestern states. U.S. West is currently
seeking to sell FSA. FSA is licensed to engage in the surety business in 42
states and the District of Columbia. FSA is engaged exclusively in the
business of writing financial guaranty insurance, on both tax-exempt and
non-municipal securities.

Firemen's, which was incorporated in New Jersey in 1855, is a wholly-
owned subsidiary of The Continental Corporation and a member of The
Continental Insurance Companies, a group of property and casualty insurance
companies the claims paying ability of which is rated AA- by Standard &
Poor's. It provides unconditional and non-cancelable insurance on
industrial development revenue bonds.

IIC, which was incorporated in California in 1920, is a wholly-owned
subsidiary of Crum and Forster, Inc., a New Jersey holding company and a
wholly-owned subsidiary of Xerox Corporation. IIC is a property and
casualty insurer which, together with certain other wholly-owned insurance
subsidiaries of Crum and Forster, Inc., operates under a Reinsurance
Participation Agreement whereby all insurance written by these companies is
pooled among them. Standard & Poor's has rated IIC's claims-paying ability
A. Any IIC/HIBI-rated Debt Obligations in an Insured Series are
additionally insured for as long as they remain in the Fund and as long as
IIC/HIBI's rating is below AAA, in order to maintain the AAA-rating of Fund
Units. The cost of any additional insurance is paid by the Fund and such
insurance would expire on the sale or maturity of the Debt Obligation.

MBIA is the principal operating subsidiary of MBIA Inc. The principal
shareholders of MBIA Inc. were originally Aetna Casualty and Surety
Company, The Fund American Companies, Inc., subsidiaries of CIGNA
Corporation and Credit Local de France, CAECL, S.A. These principal
shareholders now own approximately 13% of the outstanding common stock of
MBIA Inc. following a series of four public equity offerings over a
five-year period.

Insurance companies are subject to regulation and supervision in the
jurisdictions in which they do business under statutes which delegate
regulatory, supervisory and administrative powers to state insurance
commissioners. This regulation, supervision and administration relate,
among other things, to: the

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<PAGE>
standards of solvency which must be met and maintained; the licensing of
insurers and their agents; the nature of and limitations on investments;
deposits of securities for the benefit of policyholders; approval of policy
forms and premium rates; periodic examinations of the affairs of insurance
companies; annual and other reports required to be filed on the financial
condition of insurers or for other purposes; and requirements regarding
reserves for unearned premiums, losses and other matters. Regulatory
agencies require that premium rates not be excessive, inadequate or
unfairly discriminatory. Insurance regulation in many states also includes
"assigned risk" plans, reinsurance facilities, and joint underwriting
associations, under which all insurers writing particular lines of
insurance within the jurisdiction must accept, for one or more of those
lines, risks that are otherwise uninsurable. A significant portion of the
assets of insurance companies is required by law to be held in reserve
against potential claims on policies and is not available to general
creditors.

Although the Federal government does not regulate the business of
insurance, Federal initiatives can significantly impact the insurance
business. Current and proposed Federal measures which may significantly
affect the insurance business include pension regulation (ERISA), controls
on medical care costs, minimum standards for no-fault automobile insurance,
national health insurance, personal privacy protection, tax law changes
affecting life insurance companies or the relative desirability of various
personal investment vehicles and repeal of the current antitrust exemption
for the insurance business. (If this exemption is eliminated, it will
substantially affect the way premium rates are set by all
property-liability insurers.) In addition, the Federal government operates
in some cases as a co-insurer with the private sector insurance companies.

Insurance companies are also affected by a variety of state and
Federal regulatory measures and judicial decisions that define and extend
the risks and benefits for which insurance is sought and provided. These
include judicial redefinitions of risk exposure in areas such as products
liability and state and Federal extension and protection of employee
benefits, including pension, workers' compensation, and disability
benefits. These developments may result in short-term adverse effects on
the profitability of various lines of insurance. Longer-term adverse
effects can often be minimized through prompt repricing of coverages and
revision of policy terms. In some instances these developments may create
new opportunities for business growth. All insurance companies write
policies and set premiums based on actuarial assumptions about mortality,
injury, the occurrence of accidents and other insured events. These
assumptions, while well supported by past experience, necessarily do not
take account of future events. The occurrence in the future of unforeseen
circumstances could affect the financial condition of one or more insurance
companies. The insurance business is highly competitive and with the
deregulation of financial service businesses, it should become more
competitive. In addition, insurance companies may expand into
non-traditional lines of business which may involve different types of
risks.

State Risk Factors

Investment in a single State Trust, as opposed to a Fund which
invests in the obligations of several states, may involve some additional
risk due to the decreased diversification of economic, political, financial
and market risks. See"State Matters" for brief summaries of some of the
factors which may affect the financial condition of the States represented
in various State Trusts of Defined Asset Funds, together with summaries of
tax considerations relating to those States.

Payment of Bonds and Life of a Fund

Because Bonds from time to time may be redeemed or prepaid or will
mature in accordance with their terms or may be sold under certain
circumstances described herein, no assurance can be given that a

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<PAGE>
Portfolio will retain for any length of time its present size and
composition. Bonds may be subject to redemption prior to their stated
maturity dates pursuant to optional refunding or sinking fund redemption
provisions or otherwise. In general, optional refunding redemption
provisions are more likely to be exercised when the offer side evaluation
is at a premium over par than when it is at a discount from par. Generally,
the offer side evaluation of Bonds will be at a premium over par when
market interest rates fall below the coupon rate on the Bonds. Bonds in a
Portfolio may be subject to sinking fund provisions early in the life of a
Fund. These provisions are designed to redeem a significant portion of an
issue gradually over the life of the issue; obligations to be redeemed are
generally chosen by lot. Additionally, the size and composition of a
Portfolio will be affected by the level of redemptions of Units that may
occur from time to time and the consequent sale of Bonds. Principally, this
will depend upon the number of Holders seeking to sell or redeem their
Units and whether or not the Sponsors continue to reoffer Units acquired by
them in the secondary market. Factors that the Sponsors will consider in
the future in determining to cease offering Units acquired in the secondary
market include, among other things, the diversity of a Portfolio remaining
at that time, the size of a Portfolio relative to its original size, the
ratio of Fund expenses to income, a Fund's current and long-term returns,
the degree to which Units may be selling at a premium over par relative to
other funds sponsored by the Sponsors and the cost of maintaining a current
prospectus for a Fund. These factors may also lead the Sponsors to seek to
terminate a Fund earlier than would otherwise be the case.

Redemption

The Trustee is empowered to sell Bonds in order to make funds
available for redemption if funds are not otherwise available in the
Capital and Income Accounts. The Bonds to be sold will be selected from a
list supplied by the Sponsors. Securities will be chosen for this list by
the Sponsors on the basis of those market and credit factors as they may
determine are in the best interests of the Fund. Provision is made under
the Indenture for the Sponsors to specify minimum face amounts in which
blocks of Bonds are to be sold in order to obtain the best price for the
Fund. While these minimum amounts may vary from time to time in accordance
with market conditions, the Sponsors believe that the minimum face amounts
which would be specified would range from $25,000 for readily marketable
Bonds to $250,000 for certain Restricted Securities which can be
distributed on short notice only by private sale, usually to institutional
investors. Provision is also made that sales of Bonds may not be made so as
to (i) result in the Fund owning less than $250,000 of any Restricted
Security or (ii) result in more than 50% of the Fund consisting of
Restricted Securities. In addition, the Sponsors will use their best
efforts to see that these sales of Bonds are carried out in such a way that
no more than 40% in face amount of the Fund is invested in Restricted
Securities, provided that sales of unrestricted Securities may be made if
the Sponsors' best efforts with regard to timely sales of Restricted
Securities at prices they deem reasonable are unsuccessful and if as a
result of these sales more than 50% of the Fund does not consist of
Restricted Securities. Thus the redemption of Units may require the sale of
larger amounts of Restricted Securities than of unrestricted Securities.

Tax Exemption

In the opinion of bond counsel rendered on the date of issuance of
each Bond, the interest on each Bond is excludable from gross income under
existing law for regular Federal income tax purposes (except in certain
circumstances depending on the Holder) but may be subject to state and
local taxes and may be a preference item for purposes of the Alternative
Minimum Tax. Interest on Bonds may become subject to regular Federal income
tax, perhaps retroactively to their date of issuance, as a result of
changes in Federal law or as a result of the failure of issuers (or other
users of the proceeds of the Bonds) to comply with certain ongoing
requirements.

Moreover, the Internal Revenue Service has announced an expansion of
its examination program with respect to tax-exempt bonds. The expanded
examination program will consist of, among other measures, increased
enforcement against abusive transactions, broader audit coverage (including
the

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<PAGE>
expected issuance of audit guidelines) and expanded compliance achieved by
means of expected revisions to the tax-exempt bond information return
forms.

In certain cases, a Bond may provide that if the interest on the Bond
should ultimately be determined to be taxable, the Bond would become due
and payable by its issuer, and, in addition, may provide that any related
letter of credit or other security could be called upon if the issuer
failed to satisfy all or part of its obligation. In other cases, however, a
Bond may not provide for the acceleration or redemption of the Bond or a
call upon the related letter of credit or other security upon a
determination of taxability. In those cases in which a Bond does not
provide for acceleration or redemption or in which both the issuer and the
bank or other entity issuing the letter of credit or other security are
unable to meet their obligations to pay the amounts due on the Bond as a
result of a determination of taxability, a Trustee would be obligated to
sell the Bond and, since it would be sold as a taxable security, it is
expected that it would have to be sold at a substantial discount from
current market price. In addition, as mentioned above, under certain
circumstances Holders could be required to pay income tax on interest
received prior to the date on which the interest is determined to be
taxable.

INCOME AND RETURNS

Income

Because accrued interest on Bonds is not received by a Fund at a
constant rate throughout the year, any monthly income distribution may be
more or less than the interest actually received by the Fund. To eliminate
fluctuations in the monthly income distribution, a portion of the Public
Offering Price consists of an advance to the Trustee of an amount necessary
to provide approximately equal distributions. Upon the sale or redemption
of Units, investors will receive their proportionate share of the Trustee
advance. In addition, if a Bond is sold, redeemed or otherwise disposed of,
a Fund will periodically distribute the portion of the Trustee advance that
is attributable to that Bond to investors.

The regular monthly income distribution stated in Part A of the
Prospectus is based on a Public Offering Price of $1,000 per Unit after
deducting estimated Fund expenses, and will change as the composition of
the Portfolio changes over time.

Income is received by a Fund upon semi-annual payments of interest on
the Bonds held in a Portfolio. Bonds may sometimes be purchased on a when,
as and if issued basis or may have a delayed delivery. Since interest on
these Bonds does not begin to accrue until the date of delivery to a Fund,
in order to provide tax-exempt income to Holders for this non-accrual
period, the Trustee's Annual Fee and Expenses is reduced by the interest
that would have accrued on these Bonds between the initial settlement date
for Units and the delivery dates of the Bonds. This eliminates reduction in
Monthly Income Distributions. Should when-issued Bonds be issued later than
expected, the fee reduction will be increased correspondingly. If the
amount of the Trustee's Annual Fee and Expenses is insufficient to cover
the additional accrued interest, the Sponsors will treat the contracts as
Failed Bonds. As the Trustee is authorized to draw on the letter of credit
deposited by the Sponsors before the settlement date for these Bonds and
deposit the proceeds in an account for the Fund on which it pays no
interest, its use of these funds compensates the Trustee for the reduction
described above.

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<PAGE>
STATE MATTERS

ALABAMA

RISK FACTORS--During recent years the economy of Alabama has grown at
a slower rate than that of the U.S. The State of Alabama, other
governmental units and agencies, school systems and entities dependent on
government appropriations or economic conditions have, in varying degrees,
suffered budgetary difficulties. These conditions and other factors
described below could adversely affect the Debt Obligations that the Trust
acquires and the value of Units in the Trust. The following information
constitutes only a brief summary, does not purport to be a complete
description of potential adverse economic effects and is based primarily on
material presented in various government documents, official statements,
offering circulars and prospectuses. While the Sponsors have not
independently verified such information, they have no reason to believe
that such information is not correct in all material respects.

Limitations on State Indebtedness. Section 213 of the Constitution of
Alabama, as amended, requires that annual financial operations of Alabama
must be on a balanced budget and prohibits the State from incurring general
obligation debt unless authorized by an amendment to the Constitution.
Although conventions proposed by the Legislature and approved by the
electorate may be called for the purpose of amending the Alabama
Constitution, amendments to the Constitution have generally been adopted
through a procedure that requires each amendment to be proposed by a
favorable vote of three-fifths of all the members of each house of the
Legislature and thereafter approved by a majority of the voters of the
State voting in a statewide election. The State has statutory budget
provisions which create a proration procedure in the event estimated budget
resources in a fiscal year are insufficient to pay in full all
appropriations for such fiscal year. Proration has a materially adverse
effect on public entities, such as boards of education, that are
substantially dependent on state funds.

Court decisions have indicated that certain State expenses necessary
for essential functions of government are not subject to proration under
applicable law. The Supreme Court of Alabama has held that the debt
prohibition contained in the constitutional amendment does not apply to
obligations incurred for current operating expenses payable during the
current fiscal year, debts incurred by separate public corporations, or
state debt incurred to repel invasion or suppress insurrection. The State
may also make temporary loans not exceeding $300,000 to cover deficits in
the state treasury. Limited obligation debt may be authorized by the
legislature without amendment to the Constitution. The State has followed
the practice of financing certain capital improvement programs--principally
for highways, education and improvements to the State Docks--through the
issuance of limited obligation bonds payable solely out of certain taxes
and other revenues specifically pledged for their payment and not from the
general revenues of the State.

Medicaid. Because of Alabama's relatively high incidence of poverty,
health care providers in Alabama are more heavily dependent on Medicaid
than are health care providers in other states. Contributions to Medicaid
by the State of Alabama are financed through the General Fund of the State
of Alabama. As discussed above, because deficit spending is prohibited by
the Constitution of Alabama, allocations from the General Fund, including
Medicaid payments, may be subject to proration. In recent years the General
Fund has been subject to proration by virtue of insufficient tax revenues
and excessive expenditures, and there can be no assurance that proration of
the General Fund budget will not continue. If continued, such proration may
have a materially adverse effect on Alabama Medicaid payments.

Factors such as the increasing pressure on sources of Medicaid
funding, at both the State and the Federal level, and the expanding number
of people covered by this program, are likely to cause future concern over
the Alabama Medicaid budget. Recent federal legislation will reduce
payments made under the Federal Medicaid Program and will change the method
of calculating the payments that are due to the states from the Federal
government. Material reductions in Federal Medicaid payments to the State
of

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<PAGE>
Alabama are expected in 1998. If such reductions occur, it is unlikely
that the State of Alabama will be able to fund completely any resulting
short-falls. Health care providers in Alabama could be materially
adversely affected by these changes.

In April 1997, the Alabama Supreme Court held that the Alabama
Medicaid program has underpaid providers by limiting certain payments, and
the court enjoined the Medicaid program from any future such limitations.
Any increase in expenses resulting from these holdings could have a
materially adverse effect on other Alabama Medicaid payments. Further,
although some health care providers could benefit from these holdings, many
providers will receive no material benefit. Nevertheless, the General Fund
of the State may experience financial pressures as the result of increased
reimbursements.

According to reports in the news media, a study by a private consumer
group indicates that the level of benefits available are materially lower
and the eligibility standards significantly more stringent under the
Alabama Medicaid program than in most other states. Although, as stated
above, Alabama health care facilities are dependent on Medicaid payments,
it should be expected that health care facilities in Alabama will receive
substantially less in Medicaid payments than would health care facilities
in most other states.

Health Care Services. In recent years, the importance of service
industries to Alabama's economy has increased significantly. One of the
major service industries in the State is general health care. Because of
cost concerns, health care providers and payors are restructuring and
consolidating. Consolidation resulting in a reduction of services in the
health care industry may have a material adverse effect on the economy of
Alabama in general and, in particular, on the issuers of Debt Obligations
in the Trust secured by revenues of health care facilities. Moreover, a
recent study has concluded that, after cost-of-living adjustments are made,
Medicare payments per enrollee in Alabama are among the highest in the
nation. Changes in the Medicare program to reduce such expenditures could
have a materially adverse effect on health care providers in Alabama. In
addition, there are many possible financial effects that could result from
enactment of any federal or state legislation proposing to regulate or
reform the health care industry, and it is not possible at this time to
predict with assurance the effect of any health care reform proposals that
might be enacted.

Dependence on Federal Education Funds. Alabama is disproportionately
dependent on federal funds for secondary and higher education,
predominantly because of insufficient state and local support. Recent
federal cutbacks on expenditures for education have had, and if continued
will have, an adverse impact on educational institutions in Alabama.

On December 30, 1991, the District Court for the Northern District of
Alabama issued an opinion holding Alabama's institutions of higher learning
liable for operating a racially discriminatory dual university system. The
Court ordered several remedies and has maintained jurisdiction for ten
years to insure compliance. The Circuit Court of Appeals upheld parts of
this verdict and maintained control over the institutions. On August 1,
1995, a new ruling was issued in this case, requiring additional funding
for certain universities and colleges in Alabama. The new funding
requirements may have an adverse impact on the State budget and could
require that future state budgets be prorated. Such proration would have a
materially adverse effect on public entities throughout the state. In
addition, this change in funding could adversely affect certain educational
institutions in Alabama. If the State and the universities fail to comply
with the Court's orders, the Court may rule that Federal funds for higher
education be withheld. A ruling depriving the State of Federal funds for
higher education would have a materially adverse effect on certain Alabama
colleges and universities.

Challenge to School Funding Mechanism. On April 1, 1993, Montgomery
Circuit Court Judge Gene Reese ruled that an unconstitutional disparity
exists among Alabama's school districts because of inequitable distribution
of tax funds. Judge Reese issued an order calling for a new design for the
distribution of funds

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for educational purposes as well as a new system for funding public
education. On December 3, 1997, the Alabama Supreme Court issued a new
ruling affirming Judge Reese's determination that the disparity is
unconstitutional. The court stated that the Alabama Legislature must
develop a plan within one year to correct this disparity. Any allocation of
funds away from school districts could impair the ability of such districts
to service debt.

Alabama Industrial Characteristics. Alabama industrial capacity has
traditionally been concentrated in those areas sensitive to cyclical
economic trends, such as textiles and iron and steel production. To the
extent that American iron and steel and textile production continues to
suffer from foreign competition and other factors, the general economy of
the State and the ability of particular issuers, especially
pollution-control and certain IDB issuers, would be materially adversely
affected. The State has recently taken steps to diversify and increase its
industrial capacity. Although these efforts have been somewhat successful,
they include significant tax and other benefits which could have a mutually
adverse effect on the state's tax revenues.

General Obligation Warrants. Municipalities and counties in Alabama
traditionally have issued general obligation warrants to finance various
public improvements. Alabama statutes authorizing the issuance of such
interest-bearing warrants do not require an election prior to issuance. On
the other hand, the Constitution of Alabama (Section 222) provides that
general obligation bonds may not be issued without an election.

The Supreme Court of Alabama has held that general obligation warrants
do not require an election under Section 222 of the Constitution of
Alabama. In so holding, the Court found that warrants are not "bonds"
within the meaning of Section 222. According to the Court, warrants are not
negotiable instruments and transferees of warrants cannot be holders in due
course. Therefore, a transferee of warrants is subject to all defenses that
the issuer of such warrants may have against the transferor.

Allocation of Local Taxes for Public Education. Under Alabama law, a
city with a population in excess of 5,000 is entitled to establish a
separate public school system within its jurisdiction with its own board of
education, members of which are elected by the governing body of such city.
If a city school system is established within a county, the county-wide
taxes for general educational purposes will, absent specific law to the
contrary, be apportioned among the county board of education and each city
board of education within the county according to a statutory formula based
on the state's uniform minimum educational program for public school
systems. This formula has many factors, but is based largely on the
relative number of students within the boundaries of each school system.

Local boards of education, whether city board or county board, may
borrow money by issuing interest-bearing warrants payable solely out of
such board's allocated or apportioned share of a specified tax. The county
board's apportioned share of such tax may be diminished upon the
establishment of a city school system, which could jeopardize the payment
of the county board's warrants.

Limited Taxing Authority. Political subdivisions of the State have
limited taxing authority. Ad valorem taxes may be levied only as authorized
by the Alabama Constitution. In order to increase the rate at which any ad
valorem tax is levied above the limit otherwise provided in the
Constitution, the increase must be proposed by the governing body of the
taxing authority after a public hearing, approved by an act of the Alabama
Legislature and approved at an election within the taxing authority's
jurisdiction. In addition, the Alabama Constitution limits the total amount
of state, county, municipal and other ad valorem taxes that may be imposed
on any class of property in any one tax year. This limitation is expressed
in terms of a specified percentage of the market value of such property. In
some jurisdictions in the State this limit has already been exceeded for
one or more classes of property.

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ARIZONA

The following information is a brief summary of factors affecting the
economy in the State and does not purport to be a complete description of
such factors.

RISK FACTORS--The State Economy. The Arizona economy over the last
several decades has grown faster than in most other regions of the United
States, as measured by population, employment and personal income.
Although the rate of growth slowed considerably during the late 1980's and
early 1990's, growth rates have been increasing in recent years.

Historically, the State economy has been somewhat dependent on the
construction industry and is sensitive to trends in that sector. The
construction and real estate industries have rebounded from their
substantial declines experienced during the late 1980's and early 1990's
and are experiencing positive growth. Other principal economic sectors
include services, manufacturing, mining, tourism and the military.

A substantial amount of overbuilding occurred during the early 1980's
while the State's economy was flourishing, which adversely affected
Arizona's financial-based institutions and caused them to be placed under
the control of the Resolution Trust Corporation ("RTC"). In the aftermath
of the savings and loan crisis, which hit Arizona hard beginning in the
late 1980's, the RTC sold approximately $23.6 billion in Arizona assets as
of December 31, 1994, with $1.16 billion in assets, mostly real-estate
secured loans and real property, still to be sold as of that date. The RTC
ceased to exist on December 31, 1995, with the FDIC taking over any
remaining functions of the RTC.

The trend in the Arizona banking community for the past several years
has been one of consolidation. In the early 1980's, 56 banks operated in
Arizona; as of December 1995 there were 34. As financial institutions
within the state consolidate, many branch offices have been closed,
displacing workers.

America West Airlines, a Phoenix-based carrier, emerged from Chapter
11 reorganization in August, 1994. Prior to the reorganization, America
West was the sixth largest employer in Maricopa County. The continuation of
America West's recovery and its effect on the state economy and, more
particularly, the Phoenix economy, is uncertain.

More than 1,700 jobs were lost by the closing of Williams Air Force
Base in Chandler, Arizona, on September 30, 1993 when Williams Air Force
Base was selected as one of the military installations to be closed as a
cost-cutting measure by the Defense Base Closure and Realignment
Commission, whose recommendations were subsequently approved by the
President and the United States House of Representatives. Williams Air
Force Base injected an estimated $300 million in the local economy annually
and employed approximately 3,800 military and civilian personnel. The base
has been renamed the Williams Gateway Airport, and has been converted into
a regional civilian airport, including an aviation, educational and
business complex. Further proposed reductions in federal military
expenditures may adversely affect the Arizona economy.

Few of Arizona's largest employers are based entirely in Arizona; many
have headquarters and operations in other states. Therefore, economic
factors in other states could affect the employment situation in Arizona.

Job growth in Arizona, defined as growth of total wage and salary
employment, was consistently in the range of 2.1% to 2.5% for the years
1988 through 1990, declined to 0.6% in 1991, then increased to 1.7% in
1992, 3.0% in 1993, and 6.7% in 1994. Job growth was 6.1% in 1995, 5.6% in
1996 and is estimated at 3.7% for 1997.

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<PAGE>
The unemployment rate in Arizona was 5.3% in 1990, 5.6% in 1991, 7.4% in
1992, 6.2% in 1993, 6.4% in 1994, 5.1% in 1995 and 5.5% in 1996.
Arizona's unemployment rate is estimated at 5.3% for 1997.

Current personal income in Arizona has continued to rise, but at
slower rates than in the early to mid-1980's. Personal income grew at a
rate of 5.8% in 1990 and dropped to 4.6% in 1991. Growth in personal income
increased at a rate of 6.7% in 1992, 7.3% in 1993, 8.4% in 1994, 9.4% in
1995 and 7.5% in 1996. Growth in Arizona personal income is estimated at
6.8% for 1997.

Bankruptcy filings in the District of Arizona increased dramatically
in the mid-1980's, but percentage increases decreased during the early
1990's, with 1993 resulting in the first drop in bankruptcy filings since
1984. Bankruptcy filings totaled 19,686 in 1991, 19,883 in 1992, 17,381 in
1993, 15,008 in 1994, 15,767 in 1995, and 19,989 in 1996. While Chapter 11
filings were on a decline during 1997, consumer and wage-earning cases
continue to increase. Bankruptcy filings during 1997 totaled 24,686.

The inflation rate, as measured by the consumer price index in the
Phoenix, Arizona metropolitan area, including all of Maricopa County,
hovered around the national average during the late 1980's and early
1990's, but has been higher than the national average since 1993. The
Phoenix metropolitan area inflation rate for 1996 was 5.1%, approximately
2% higher than the national average for 1996. The Phoenix metropolitan
area inflation rate remained well above the national average during the
first quarter of 1997, with a rate of 5.2%. The Phoenix metropolitan area
inflation rate for 1997 is estimated at 4.9%, compared to an estimated
national average rate of 2.9%.

For several decades the population of the State of Arizona has grown
at a substantially higher rate than the population of the United States.
Arizona's population rose 35% between 1980 and 1990, according to the 1990
census, a rate exceeded only in Nevada and Alaska. Nearly 950,000
residents were added during this period. Population growth across Arizona
between 1990 and 1996 greatly outpaced the national average; Arizona's
population rose more than three times as fast as the national average
during this period. Although significantly greater than the national
average population growth, it is lower than Arizona's population growth in
the mid-1980's. The rate of population growth in Arizona was expected to
drop slightly in 1997. Census data show that in the 1990's, California has
been Arizona's largest source of in-migration. Recent data concerning 1996
population growth indicates that out-migration from California has now
slowed substantially, which could affect the level of Arizona's net in-
migration.

The State Budget, Revenues and Expenditures. The state operates on a
fiscal year beginning July 1 and ending June 30. Fiscal year 1997 refers to
the year ending June 30, 1997. Fiscal year 1998 refers to the year ending
June 30, 1998.

The General Fund revenues for fiscal year 1997 are estimated at $4.865
billion. Total General Fund revenues of $4.711 billion are expected during
fiscal year 1998. Approximately 46.2% of this expected revenue comes from
sales and use taxes, 37.6% from income taxes (both individual and
corporate) and 0.9% from property taxes. In addition to taxes, revenue
includes non-tax items such as income from the state lottery, licenses,
fees and permits, and interest.

The General Fund expenditures for fiscal year 1997 are estimated at
$4.830 billion. For fiscal year 1998, General Fund expenditures of $5.092
billion are expected. Approximately 41.7% of major General Fund
appropriations are for the Department of Education for K-12, 15.7% is for
higher education, 9.8% is for the administration of the AHCCCS program (the
State's alternative to Medicaid), 7.6% is for the Department of Economic
Security, 4.2% is for the Department of Health Services and 9.1% is for the
Department of Corrections.

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<PAGE>
Most or all of the Debt Obligations of the Arizona Trust are not
obligations of the State of Arizona, and are not supported by the State's
taxing powers. The particular source of payment and security for each of
the Debt Obligations is detailed in the instruments themselves and in
related offering materials. There can be no assurances, however, with
respect to whether the market value or marketability of any of the Debt
Obligations issued by an entity other than the State of Arizona will be
affected by the financial or other condition of the State or of any entity
located within the State. In addition, it should be noted that the State of
Arizona, as well as counties, municipalities, political subdivisions and
other public authorities of the state, are subject to limitations imposed
by Arizona's constitution with respect to ad valorem taxation, bonded
indebtedness and other matters. For example, the state legislature cannot
appropriate revenues in excess of 7% of the total personal income of the
state in any fiscal year. These limitations may affect the ability of the
issuers to generate revenues to satisfy their debt obligations.

The Arizona voters have passed a measure which requires a two-thirds
vote of the legislature to increase State taxes, which could make it more
difficult to reverse tax reduction measures which have been enacted in
recent years. This measure could adversely affect State fund balances and
fiscal conditions. There have also been periodic attempts in the form of
voter initiatives and legislative proposals to further limit the amount of
annual increases in taxes that can be levied by the various taxing
jurisdictions without voter approval. It is impossible to predict whether
any such proposals will ever be enacted or what the effect of any such
proposals would be. However, if such proposals were enacted, there could
be an adverse impact on State or local government financing.

School Finance. In 1991, the State of Arizona was sued by four school
districts within the state, claiming that the state's funding system for
school buildings, equipment and other capital expenses is unconstitutional.
The lawsuit was filed by the Arizona Center for Law in the Public Interest
and Southern Arizona Legal Aid Inc., but fifty other school districts
helped finance the lawsuit. A state judge rejected the lawsuit in September
of 1992, and the school districts appealed. In July of 1994, the Supreme
Court of Arizona reversed the lower court ruling and found that the
formulas for funding public schools in Arizona cause "gross disparities"
among school districts and therefore violate the Arizona Constitution. The
lawsuit did not seek damages. The Arizona Supreme Court upheld a state
court decision imposing a deadline of June 30, 1998 to comply with the
Supreme Court mandate. The Arizona legislature recently adopted a new
funding program in response to the judgment, but a state court judge has
ruled that the program fails to meet the requirements of the Arizona
Supreme Court mandate. On October 24, 1997, the Arizona Supreme Court
affirmed the trial court's decision and issued an opinion explaining its
reasoning on December 23, 1997. It is not yet known what further action
will be taken by the legislature and whether that action will satisfy the
requirements of the judgement. It remains unclear what effect the
judgment will have on state finances or school district budgets.

Health Care Facilities. Arizona does not participate in the federally
administered Medicaid program. Instead, the state administers an
alternative program, the Arizona Health Care Cost Containment System
("AHCCCS"), which provides health care to indigent persons meeting certain
financial eligibility requirements, through managed care programs. AHCCCS
is financed by a combination of federal, state and county funds.

Under state law, hospitals retain the authority to raise rates with
notification and review by, but not approval from, the Department of Health
Services. Hospitals in Arizona have experienced profitability problems
along with those in other states.

Health care firms have been in the process of consolidating.
Continuing consolidation and merger activity in the health care industry is
expected.

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<PAGE>
Utilities. Arizona's utilities are subject to regulation by the Arizona
Corporation Commission. This regulation extends to, among other things, the
issuance of certain debt obligations by regulated utilities and periodic
rate increases needed by utilities to cover operating costs and debt
service. The inability of any regulated public utility to secure necessary
rate increases could adversely affect the utility's ability to pay debt
service.

Arizona's largest regulated utility, Arizona Public Service Company
("APS"), serves all or part of 11 of Arizona's 15 counties and provides
electric service to approximately 700,000 customers. APS is a significant
part owner of Arizona's nuclear generator, the Palo Verde Nuclear
Generating Station. APS is owned by Pinnacle West Capital Corporation
("Pinnacle West").

The Salt River Project Agricultural Improvement and Power District
("SRP") is an agricultural improvement district organized under state law.
For this reason, SRP is not subject to regulation by the Arizona
Corporation Commission. SRP, one of the nation's five largest locally owned
public power utilities, provides electric service to approximately 600,000
customers (consumer, commercial and industrial) within a 2,900 square mile
area in parts of Maricopa, Gila and Pinal Counties in Arizona.

Under Arizona law, SRP's board of directors has the exclusive
authority to establish rates for electricity. SRP must follow certain
procedures, including certain public notice requirements and a special
board of directors meeting, before implementing any changes in standard
electric rates.

Two special purpose irrigation districts formed for the purpose of
issuing bonds to finance the purchase of Colorado River water from the
Central Arizona Project filed for bankruptcy in 1994 under Chapter 9 of the
United States Bankruptcy Code as a result of the districts' inability to
collect tax revenue sufficient to service their bonded debt. The financial
problems arose from a combination of unexpectedly high costs of
constructing the Central Arizona Project, plummeting land values resulting
in a need to increase property taxes and refusal by many landowners in the
districts to shoulder the increased tax burden. In June 1995 a bankruptcy
plan was confirmed for one district, which returned to bondholders 57 cents
on the dollar of their principal and placed an additional 42 cents on the
dollar in new 8% bonds maturing in seven years. The proceedings with
respect to the second district are continuing.

Other Factors. The uncertainty concerning the Mexico economy could
have an impact on Arizona's economy, as trade and tourism in the southern
regions of the state bordering Mexico could be affected by the condition of
the Mexico economy.

CALIFORNIA

The following information constitutes only a brief summary, does not
purport to be a complete description, and is based on information drawn
from official statements and prospectuses relating to securities offerings
of the State of California and various local agencies in California,
available as of the date of this Prospectus. While the Sponsors have not
independently verified such information, they have no reason to believe
that such information is not correct in all material respects.

Economic Factors.

Fiscal Years Prior to 1995-96. Pressures on the State's budget in the
late 1980's and early 1990's were caused by a combination of external
economic conditions and growth of the largest General Fund Programs -- K-4
education, health, welfare and corrections -- at rates faster than the
revenue base. These pressures could continue as the State's overall
population and school age population continue to grow, and as the State's
corrections program responds to a "Three Strikes" law enacted in 1994,
which requires

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<PAGE>
mandatory life prison terms for certain third-time felony offenders. In
addition, the State's health and welfare programs are in a transition
period as a result of recent federal and State welfare reform initiatives.

As a result of these factors and others, and especially because a
severe recession between 1990-94 reduced revenues and increased
expenditures for social welfare programs, from the late 1980's until 1992-
93, the State had periods of significant budget imbalance. During this
period, expenditures exceeded revenues in four out of six years, and the
State accumulated and sustained a budget deficit in its budget reserve, the
Special Fund for Economic Uncertainties ("SFEU") approaching $2.8 billion
at its peak at June 30, 1993. Between the 1991-92 and 1994-95 Fiscal
Years, each budget required multibillion dollar actions to bring projected
revenues and expenditures into balance, including significant cuts in
health and welfare program expenditures; transfers of program
responsibilities and funding from the State to local governments; transfers
of about $3.6 billion in annual local property tax revenues from other
local governments to local school districts, thereby reducing State funding
for schools under Proposition 98; and revenue increases (particularly in
the 1991-92 Fiscal Year budget), most of which were for a short duration.

Despite these budget actions, as noted, the effects of the recession
led to large, unanticipated deficits in the SFEU, as compared to projected
positive balances. By the 1993-94 Fiscal Year, the accumulated deficit was
so large that it was impractical to budget to retire such deficits in one
year, so a two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over to the end of
the fiscal year. When the economy failed to recover sufficiently in 1993-
94, a second two-year plan was implemented in 1994-95, again using cross-
fiscal year revenue anticipation warrants to partly finance the deficit
into the 1995-96 fiscal year.

Another consequence of the accumulated budget deficits, together with
other factors such as disbursement of funds to local school districts
"borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to
pay its ongoing obligations. When the Legislature and the Governor failed
to adopt a budget for the 1992-93 Fiscal Year by July 1, 1992, which would
have allowed the State to carry out its normal annual cash flow borrowing
to replenish cash reserves, the State Controller issued registered warrants
to pay a variety of obligations representing prior years' or continuing
appropriations, and mandates from court orders. Available funds were used
to make constitutionally-mandated payments, such as debt service on bonds
and warrants. Between July 1 and September 4, 1992, when the budget was
adopted, the State Controller issued a total of approximately $3.8 billion
of registered warrants.

For several fiscal years during the recession, the State was forced to
rely on external debt markets to meet its cash needs, as a succession of
notes and revenue anticipation warrants were issued in the period from June
1992 to July 1994, often needed to pay previously maturing notes or
warrants. These borrowings were used also in part to spread out the
repayment of the accumulated budget deficit over the end of a fiscal year,
as noted earlier. The last and largest of these borrowings was $4.0
billion of revenue anticipation warrants which were issued in July, 1994
and matured on April 25, 1996.

1995-96 and 1996-97 Fiscal Years. With the end of the recession, and
a growing economy beginning in 1994, the State's financial condition
improved markedly in the last two fiscal years, with a combination of
better than expected revenues, slowdown in growth of social welfare
programs, and continued spending restraint based on the actions taken in
earlier years. The last of the recession-induced budget deficits was
repaid, allowing the SFEU to post a positive cash balance for only the
second time in the 1990's, totaling $281 million as of June 30, 1997. The
State's cash position also returned to health, as cash flow borrowing was
limited to $3 billion in 1996-97, and no deficit borrowing has occurred
over the end of these last two fiscal years.

In each of these two fiscal years, the State budget contained the
following major features:

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. Expenditures for K-14 schools grew significantly, as new revenues
were directed to school spending under Proposition 98. This new money
allowed several new education initiatives to be funded, and raised K-12 per-
pupil spending to around $4,900 by Fiscal Year 1996-97. See "STATE
FINANCES - Proposition 98" above.

. The budgets restrained health and welfare spending levels, holding
to reduced benefit levels enacted in earlier years, and attempted to reduce
General Fund spending by calling for greater support from the federal
government. The State also attempted to shift to the federal government a
larger share of the cost of incarceration and social services for illegal
aliens. Some of these efforts were successful, and federal welfare reform
also helped, but as a whole the federal support never reached the levels
anticipated when the budgets were enacted. These funding shortfalls were,
however, filled by the strong revenue collections, which exceeded
expectations.

. General Fund support for the University of California and the
California State University system grew by an average of 5.2 percent and
3.3 percent per year, respectively, and there were no increases in student
fees.

. General Fund support for the Department of Corrections grew as
needed to meet increased prison population. No new prisons were approved
for construction, however.

. There were no tax increases, and starting January 1, 1997, there
was a 5 percent cut in corporate taxes. The suspension of the Renter's Tax
Credit, first taken as a cost-saving measure during the recession, was
continued.

As noted, the economy grew strongly during these fiscal years, and as
a result, the General Fund took in substantially greater tax revenues
(about $2.2 billion in 1995-96 and $1.6 billion in 1996-97) than were
initially planned when the budgets were enacted. These additional funds
were largely directed to school spending as mandated by Proposition 98, and
to make up shortfalls from reduced federal health and welfare aid. As a
result, there was no dramatic increase in budget reserves, although the
accumulated budget deficit from the recession years was finally eliminated
in the past fiscal year.

1997-98 Fiscal Year.

Background. On January 9, 1997, the Governor released his proposed
budget for the 1997-98 Fiscal Year (the "Proposed Budget"). The Proposed
Budget estimated General Fund revenues and transfers of about $50.7
billion, and proposed expenditures of $50.3 billion, resulting in an
anticipated budget reserve in the SFEU of about $550 million. The Proposed
Budget included provisions for a further 10% cut in Bank and Corporation
Taxes, which ultimately was not enacted by the Legislature.

At the time of the Department of Finance May Revision, released on May
14, 1997, the Department of Finance increased its revenue estimate for the
upcoming fiscal year by $1.3 billion, in response to the continued strong
growth in the State's economy. Budget negotiations continued into the
summer, with major issues to be resolved including final agreement on State
welfare reform, an increase in State employee salaries and consideration of
the tax cut proposed by the Governor.

In May, 1997, action was taken by the California Supreme Court in an
ongoing lawsuit, PERS v. Wilson, below, which made final a judgment against
the State requiring an immediate payment from the General Fund to the
Public Employees Retirement Fund ("PERF") to make up certain deferrals in
annual retirement fund contributions which had been legislated in earlier
years for budget savings, and which the courts found to be
unconstitutional. On July 30, 1997, following a direction from the
Governor, the

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<PAGE>
Controller transferred $1.235 billion from the General Fund to the PERF in
satisfaction of the judgment, representing the principal amount of the
improperly deferred payments from 1995-96 and 1996-97.

Fiscal Year 1997-98 Budget Act. Following the transfer of funds to
the PERF, final agreement was reached within a few weeks on the welfare
package and the remainder of the budget. The Legislature passed the Budget
Bill on August 11, 1997, along with numerous related bills to implement its
provisions. Agreement was not finally reached at that time on one aspect
of the budget plan, concerning the Governor's proposal for a comprehensive
educational testing program.

On August 18, 1997, the Governor signed the Budget Act, but vetoed
about $314 million of specific spending items, primarily in health and
welfare and education areas from both the General Fund and Special Funds.

The Budget Act anticipates General Fund revenues and transfers of
$52.5 billion (a 6.8 percent increase over the final 1996-97 amount), and
expenditures of $52.8 billion (an 8.0 percent increase from the 1996-97
levels). (The expenditure figure assumes restoration of $48 million of
welfare program savings which were contained in a bill vetoed by the
Governor because of other provisions and also assumes enactment of
legislation to restore $203 million of expenditures associated with
education upon agreement by the Legislature and the Governor of a
satisfactory testing program.) On a budgetary basis, SFEU is projected to
decrease from $408 million at June 30, 1997 to $112 million at June 30,
1998. The Budget Act also includes Special Fund expenditures of $14.4
billion (as against estimated Special Fund revenues of $14.0 billion), and
$2.1 billion of expenditures from various Bond Funds.

The following are major features of the 1997-98 Budget Act:

1. For the second year in a row, the Budget contains a large increase
in funding for K-14 education under Proposition 98, reflecting strong
revenues which have exceeded initial budgeted amounts. Part of the nearly
$1.75 billion in increased spending is allocated to prior fiscal years.
Funds are provided to fully pay for the cost-of-living - increase component
of Proposition 98, and to extend the class size reduction and reading
initiatives. See "STATE FINANCES - Proposition 98" above.

. The Budget Act reflects the $1.235 billion pension case judgment
payment, and brings funding of the State's pension contribution back to the
quarterly basis which existed prior to the deferral actions which were
invalidated by the courts. There is no provision for any additional
payment relating to this case.

. Continuing the third year of a four-year "compact" which the
Administration has made with higher education units, funding from the
General Fund for the University of California and the California State
University system has increased by approximately 6 percent ($121 million
and $107 million, respectively). There was no increase in student fees.

. Because of the effect of the pension payment, most other State
programs were continued at 1996-97 levels, adjusted for caseload changes.

. Health and welfare costs are contained, continuing generally the
grant levels from prior years, as part of the initial implementation of the
new CalWORKs program.

. Unlike prior years, this budget Act does not depend on uncertain
federal budget actions. About $300 million in general funds, already
included in the federal FY 1997 and 1998 budgets, are included in the
Budget Act, to offset incarceration costs for illegal aliens.

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<PAGE>
. The Budget Act contains no tax increases, and no tax reductions.
The Renters Tax Credit was suspended for another year, saving approximately
$500 million. The Legislature has not made any decision on conformity of
State tax laws to the recent federal tax reduction bill; a comprehensive
review of this subject is expected to take place next year.

The Orange County Bankruptcy. On December 6, 1994, Orange County,
California and its Investment Pool (the "Pool") filed for bankruptcy under
Chapter 9 of the United States Bankruptcy Code. The subsequent
restructuring led to the sale of substantially all of the Pool's portfolio
and resulted in losses estimated to be approximately $1.7 billion (or
approximately 22% of amounts deposited by the Pool investors).
Approximately 187 California public entities -- substantially all of which
are public agencies within the county -- had various bonds, notes or other
forms of indebtedness outstanding. In some instances the proceeds of such
indebtedness were invested in the Pool. In April, 1996, the County emerged
from bankruptcy after closing on a $900 million recovery bond transaction.
At that time, the County and its financial advisors stated that the County
had emerged from the bankruptcy without any structural fiscal problems and
assured that the County would not slip back into bankruptcy. However, for
many of the cities, schools and special districts that lost money in the
County portfolio, repayment remains contingent on the outcome of litigation
which is pending against investment firms and other finance professionals.
Thus, it is impossible to determine the ultimate impact of the bankruptcy
and its aftermath on these various agencies and their claims.

In May 1996, a taxpayer action was filed against the City of San Diego
("San Diego") and the San Diego Convention Center Expansion Authority (the
"Authority") challenging the validity of a lease revenue financing
involving a lease (the "San Diego Lease") having features similar to the
leases commonly used in California lease-based financings such as
certificates of participation (the "Rider Case"). The Rider Case
plaintiffs alleged that voter approval is required for the San Diego Lease
(a) since the lease constituted indebtedness prohibited by Article XVI,
Section 18 of the California Constitution without a two-thirds vote of the
electorate, and (b) since San Diego was prohibited under its charter from
issuing bonds without a two-thirds vote of the electorate, and the power of
the Authority, a joint powers' authority, one of the members of which is
San Diego, to issue bonds is no greater than the power of San Diego. In
response to San Diego's motion for summary judgement, the trial court
rejected the plaintiff's arguments and ruled that the San Diego Lease was
constitutionally valid and that the Authority's related lease revenue bonds
did not require voter approval. The plaintiffs appealed the matter to the
Court of Appeals for the Fourth District, which affirmed the validity of
the San Diego Lease and of the lease revenue bond financing arrangements.
The plaintiffs then filed a petition for review with the California State
Supreme Court, and, on April 2, 1997, the Court granted the plaintiff's
petition for review. No decision from the Supreme Court is expected prior
to the Court's 1998 calendar year.

Constitutional, Legislative and Other Factors.

Certain California constitutional amendments, legislative measures,
executive orders, administrative regulations and voter initiatives could
produce the adverse effects described below.

Revenue Distribution. Certain Debt Obligations in the Portfolio may be
obligations of issuers which rely in whole or in part on California State
revenues for payment of these obligations. Property tax revenues and a
portion of the State's general fund surplus are distributed to counties,
cities and their various taxing entities and the State assumes certain
obligations theretofore paid out of local funds. Whether and to what extent
a portion of the State's general fund will be distributed in the future to
counties, cities and their various entities, is unclear.

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Health Care Legislation. Certain Debt Obligations in the Portfolio may be
obligations which are payable solely from the revenues of health care
institutions. Certain provisions under California law may adversely affect
these revenues and, consequently, payment on those Debt Obligations.

The Federally sponsored Medicaid program for health care services to
eligible welfare beneficiaries in California is known as the Medi-Cal
program. Historically, the Medi-Cal program has provided for a cost-based
system of reimbursement for inpatient care furnished to Medi-Cal
beneficiaries by any hospital wanting to participate in the Medi-Cal
program, provided such hospital met applicable requirements for
participation. California law now provides that the State of California
shall selectively contract with hospitals to provide acute inpatient
services to Medi-Cal patients. Medi-Cal contracts currently apply only to
acute inpatient services. Generally, such selective contracting is made on
a flat per diem payment basis for all services to Medi-Cal beneficiaries,
and generally such payment has not increased in relation to inflation,
costs or other factors. Other reductions or limitations may be imposed on
payment for services rendered to Medi-Cal beneficiaries in the future.

Under this approach, in most geographical areas of California, only
those hospitals which enter into a Medi-Cal contract with the State of
California will be paid for non-emergency acute inpatient services rendered
to Medi-Cal beneficiaries. The State may also terminate these contracts
without notice under certain circumstances and is obligated to make
contractual payments only to the extent the California legislature
appropriates adequate funding therefor.

California enacted legislation in 1982 that authorizes private health
plans and insurers to contract directly with hospitals for services to
beneficiaries on negotiated terms. Some insurers have introduced plans
known as "preferred provider organizations" ("PPOs"), which offer financial
incentives for subscribers who use only the hospitals which contract with
the plan. Under an exclusive provider plan, which includes most health
maintenance organizations ("HMOs"), private payors limit coverage to those
services provided by selected hospitals. Discounts offered to HMOs and PPOs
may result in payment to the contracting hospital of less than actual cost
and the volume of patients directed to a hospital under an HMO or PPO
contract may vary significantly from projections. Often, HMO or PPO
contracts are enforceable for a stated term, regardless of provider losses
or of bankruptcy of the respective HMO or PPO. It is expected that failure
to execute and maintain such PPO and HMO contracts would reduce a
hospital's patient base or gross revenues. Conversely, participation may
maintain or increase the patient base, but may result in reduced payment
and lower net income to the contracting hospitals.

These Debt Obligations may also be insured by the State of California
pursuant to an insurance program implemented by the Office of Statewide
Health Planning and Development for health facility construction loans. If
a default occurs on insured Debt Obligations, the State Treasurer will
issue debentures payable out of a reserve fund established under the
insurance program or will pay principal and interest on an unaccelerated
basis from unappropriated State funds. At the request of the Office of
Statewide Health Planning and Development, Arthur D. Little, Inc. prepared
a study in December, 1983, to evaluate the adequacy of the reserve fund
established under the insurance program and based on certain formulations
and assumptions found the reserve fund substantially underfunded. In
September of 1986, Arthur D. Little, Inc. prepared an update of the study
and concluded that an additional 10% reserve be established for
"multi-level" facilities. For the balance of the reserve fund, the update
recommended maintaining the current reserve calculation method. In March of
1990, Arthur D. Little, Inc. prepared a further review of the study and
recommended that separate reserves continue to be established for
"multi-level" facilities at a reserve level consistent with those that
would be required by an insurance company.

Mortgages and Deeds. Certain Debt Obligations in the Portfolio may be
obligations which are secured in whole or in part by a mortgage or deed of
trust on real property. California has five principal statutory provisions
which limit the remedies of a creditor secured by a mortgage or deed of
trust. Two

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statutes limit the creditor's right to obtain a deficiency judgment, one
limitation being based on the method of foreclosure and the other on the
type of debt secured. Under the former, a deficiency judgment is barred
when the foreclosure is accomplished by means of a nonjudicial trustee's
sale. Under the latter, a deficiency judgment is barred when the foreclosed
mortgage or deed of trust secures certain purchase money obligations.
Another California statute, commonly known as the "one form of action"
rule, requires creditors secured by real property to exhaust their real
property security by foreclosure before bringing a personal action against
the debtor. The fourth statutory provision limits any deficiency judgment
obtained by a creditor secured by real property following a judicial sale
of such property to the excess of the outstanding debt over the fair value
of the property at the time of the sale, thus preventing the creditor from
obtaining a large deficiency judgment against the debtor as the result of
low bids at a judicial sale. The fifth statutory provision gives the debtor
the right to redeem the real property from any judicial foreclosure sale as
to which a deficiency judgment may be ordered against the debtor.

Upon the default of a mortgage or deed of trust with respect to
California real property, the creditor's nonjudicial foreclosure rights
under the power of sale contained in the mortgage or deed of trust are
subject to the constraints imposed by California law upon transfers of
title to real property by private power of sale. During the three-month
period beginning with the filing of a formal notice of default, the debtor
is entitled to reinstate the mortgage by making any overdue payments. Under
standard loan servicing procedures, the filing of the formal notice of
default does not occur unless at least three full monthly payments have
become due and remain unpaid. The power of sale is exercised by posting and
publishing a notice of sale for at least 20 days after expiration of the
three-month reinstatement period. The debtor may reinstate the mortgage in
the manner described above, up to five business days prior to the scheduled
sale date. Therefore, the effective minimum period for foreclosing on a
mortgage could be in excess of seven months after the initial default. Such
time delays in collections could disrupt the flow of revenues available to
an issuer for the payment of debt service on the outstanding obligations if
such defaults occur with respect to a substantial number of mortgages or
deeds of trust securing an issuer's obligations.

In addition, a court could find that there is sufficient involvement
of the issuer in the nonjudicial sale of property securing a mortgage for
such private sale to constitute "state action," and could hold that the
private-right-of-sale proceedings violate the due process requirements of
the Federal or State Constitutions, consequently preventing an issuer from
using the nonjudicial foreclosure remedy described above.

Certain Debt Obligations in the Portfolio may be obligations which
finance the acquisition of single family home mortgages for low and
moderate income mortgagors. These obligations may be payable solely from
revenues derived from the home mortgages, and are subject to California's
statutory limitations described above applicable to obligations secured by
real property. Under California antideficiency legislation, there is no
personal recourse against a mortgagor of a single family residence
purchased with the loan secured by the mortgage, regardless of whether the
creditor chooses judicial or nonjudicial foreclosure.

Under California law, mortgage loans secured by single-family
owner-occupied dwellings may be prepaid at any time. Prepayment charges on
such mortgage loans may be imposed only with respect to voluntary
prepayments made during the first five years during the term of the
mortgage loan, and then only if the borrower prepays an amount in excess of
20% of the original principal amount of the mortgage loan in a 12-month
period; a prepayment charge cannot in any event exceed six months' advance
interest on the amount prepaid during the 12-month period in excess of 20%
of the original principal amount of the loan. This limitation could affect
the flow of revenues available to an issuer for debt service on the
outstanding debt obligations which financed such home mortgages.

Proposition 13. Certain of the Debt Obligations may be obligations of
issuers who rely in whole or in part on ad valorem real property taxes as a
source of revenue. On June 6, 1978, California voters

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approved an amendment to the California Constitution known as Proposition
13, which added Article XIIIA to the California Constitution. The effect of
Article XIIIA was to limit ad valorem taxes on real property and to
restrict the ability of taxing entities to increase real property tax
revenues.

Section 1 of Article XIIIA, as amended, limits the maximum ad valorem
tax on real property to 1% of full cash value, to be collected by the
counties and apportioned according to law. The 1% limitation does not apply
to ad valorem taxes or special assessments to pay the interest and
redemption charges on any bonded indebtedness for the acquisition or
improvement of real property approved, by two-thirds of the votes cast by
the voters voting on the proposition. Section 2 of Article XIIIA defines
"full cash value" to mean "the County Assessor's valuation of real property
as shown on the 1975/76 tax bill under "full cash value" or, thereafter,
the appraised value of real property when purchased, newly constructed, or
a change in ownership has occurred after the 1975 assessment." The full
cash value may be adjusted annually to reflect inflation at a rate not to
exceed 2% per year, or reduction in the consumer price index or comparable
local data, or reduced in the event of declining property value caused by
damage, destruction or other factors.

Legislation enacted by the California Legislature to implement Article
XIIIA provides that notwithstanding any other law, local agencies may not
levy any ad valorem property tax except to pay debt service on indebtedness
approved by the voters prior to July 1, 1978, and that each county will
levy the maximum tax permitted by Article XIIIA.

Proposition 9. On November 6, 1979, an initiative known as
"Proposition 9" or the "Gann Initiative" was approved by the California
voters, which added Article XIIIB to the California Constitution. Under
Article XIIIB, State and local governmental entities have an annual
"appropriations limit" and are not allowed to spend certain moneys called
"appropriations subject to limitation" in an amount higher than the
"appropriations limit." Article XIIIB does not affect the appropriation of
moneys which are excluded from the definition of "appropriations subject to
limitation," including debt service on indebtedness existing or authorized
as of January 1, 1979, or bonded indebtedness subsequently approved by the
voters. In general terms, the "appropriations limit" is required to be
based on certain 1978/79 expenditures, and is to be adjusted annually to
reflect changes in consumer prices, population, and certain services
provided by these entities. Article XIIIB also provides that if these
entities' revenues in any year exceed the amounts permitted to be spent,
the excess is to be returned by revising tax rates or fee schedules over
the subsequent two years.

Proposition 98. On November 8, 1988, voters of the State approved
Proposition 98, a combined initiative constitutional amendment and statute
called the "Classroom Instructional Improvement and Accountability Act."
Proposition 98 changed State funding of public education below the
university level and the operation of the State Appropriations Limit,
primarily by guaranteeing K-14 schools a minimum share of General Fund
revenues. Under Proposition 98 (modified by Proposition 111 as discussed
below), K-14 schools are guaranteed the greater of (a) in general, a fixed
percent of General Fund revenues ("Test 1"), (b) the amount appropriated to
K-14 schools in the prior year, adjusted for changes in the cost of living
(measured as in Article XIII B by reference to State per capita personal
income) and enrollment ("Test 2"), or (c) a third test, which would replace
Test 2 in any year when the percentage growth in per capita General Fund
revenues from the prior year plus one half of one percent is less than the
percentage growth in State per capita personal income ("Test 3"). Under
Test 3, schools would receive the amount appropriated in the prior year
adjusted for changes in enrollment and per capita General Fund revenues,
plus an additional small adjustment factor. If Test 3 is used in any year,
the difference between Test 3 and Test 2 would become a "credit" to schools
which would be the basis of payments in future years when per capita
General Fund revenue growth exceeds per capita personal income growth.

Proposition 98 permits the Legislature -- by two-thirds vote of both
houses, with the Governor's concurrence -- to suspend the K-14 schools'
minimum funding formula for a one-year period. Proposition

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98 also contains provisions transferring certain State tax revenues in
excess of the Article XIII B limit to K-14 schools.

During the recession years of the early l990s, General Fund revenues
for several years were less than originally projected, so that the original
Proposition 98 appropriations turned out to be higher than the minimum
percentage provided in the law. The Legislature responded to these
developments by designating the "extra" Proposition 98 payments in one year
as a "loan" from future years' Proposition 98 entitlements, and also
intended that the "extra" payments would not be included in the Proposition
98 "base" for calculating future years' entitlements. In 1992, a lawsuit
was filed, California Teachers' Association v. Gould, which challenged the
validity of these off-budget loans. During the course of this litigation, a
trial court determined that almost $2 billion in "loans" which had been
provided to school districts during the recession violated the
constitutional protection of support for public education. A settlement was
reached on April 12, 1996 which ensures that future school funding will not
be in jeopardy over repayment of these so-called loans.

Proposition 111. On June 30, 1989, the California Legislature enacted
Senate Constitutional Amendment 1, a proposed modification of the
California Constitution to alter the spending limit and the education
funding provisions of Proposition 98. Senate Constitutional Amendment 1, on
the June 5, 1990 ballot as Proposition 111, was approved by the voters and
took effect on July 1, 1990. Among a number of important provisions,
Proposition 111 recalculated spending limits for the State and for local
governments, allowed greater annual increases in the limits, allowed the
averaging of two years' tax revenues before requiring action regarding
excess tax revenues, reduced the amount of the funding guarantee in
recession years for school districts and community college districts (but
with a floor of 40.9 percent of State general fund tax revenues), removed
the provision of Proposition 98 which included excess moneys transferred to
school districts and community college districts in the base calculation
for the next year, limited the amount of State tax revenue over the limit
which would be transferred to school districts and community college
districts, and exempted increased gasoline taxes and truck weight fees from
the State appropriations limit. Additionally, Proposition 111 exempted from
the State appropriations limit funding for capital outlays.

Proposition 62. On November 4, 1986, California voters approved an
initiative statute known as Proposition 62. This initiative provided the
following: (i) requires that any tax for general governmental purposes
imposed by local governments be approved by resolution or ordinance adopted
by a two-thirds vote of the governmental entity's legislative body and by a
majority vote of the electorate of the governmental entity, (ii) requires
that any special tax (defined as taxes levied for other than general
governmental purposes) imposed by a local governmental entity be approved
by a two-thirds vote of the voters within that jurisdiction, (iii)
restricts the use of revenues from a special tax to the purposes or for the
service for which the special tax was imposed, (iv) prohibits the
imposition of ad valorem taxes on real property by local governmental
entities except as permitted by Article XIIIA, (v) prohibits the imposition
of transaction taxes and sales taxes on the sale of real property by local
governments, (vi) requires that any tax imposed by a local government on or
after August 1, 1985 be ratified by a majority vote of the electorate
within two years of the adoption of the initiative, (vii) requires that, in
the event a local government fails to comply with the provisions of this
measure, a reduction in the amount of property tax revenue allocated to
such local government occurs in an amount equal to the revenues received by
such entity attributable to the tax levied in violation of the initiative,
and (viii) permits these provisions to be amended exclusively by the voters
of the State of California.

In September 1988, the California Court of Appeal in City of
Westminster v. County of Orange, 204 Cal. App. 3d 623, 215 Cal. Rptr. 511
(Cal. Ct. App. 1988), held that Proposition 62 is unconstitutional to the
extent that it requires a general tax by a general law city, enacted on or
after August 1, 1985 and prior to the effective date of Proposition 62, to
be subject to approval by a majority of voters. The Court held that the
California Constitution prohibits the imposition of a requirement that
local tax measures be submitted

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to the electorate by either referendum or initiative. It is not possible to
predict the impact of this decision on charter cities, on special taxes or
on new taxes imposed after the effective date of Proposition 62.

The California Court of Appeal in City of Woodlake v. Logan, (1991)
230 Cal.App.3d 1058, subsequently held that Proposition 62's popular vote
requirements for future local taxes also provided for an unconstitutional
referenda. The California Supreme Court declined to review both the City of
Westminster and the City of Woodlake decisions.

In Santa Clara Local Transportation Authority v. Guardino, (Sept. 28,
1995) 11 Cal.4th 220, reh'g denied, modified (Dec. 14, 1995) 12 Cal.4th
344e, the California Supreme Court upheld the constitutionality of
Proposition 62's popular vote requirements for future taxes, and
specifically disapproved of the City of Woodlake decision as erroneous. The
Court did not determine the correctness of the City of Westminster
decision, because that case appeared distinguishable, was not relied on by
the parties in Guardino, and involved taxes not likely to still be at
issue. It is impossible to predict the impact of the Supreme Court's
decision on charter cities or on taxes imposed in reliance on the City of
Woodlake case.

Senate Bill 1590 (O'Connell), introduced February 16, 1996, would make
the Guardino decision inapplicable to any tax first imposed or increased by
an ordinance or resolution adopted before December 14, 1995. The California
State Senate passed the Bill on May 16, 1996 and it is currently pending in
the California State Assembly. It is not clear whether the Bill, if
enacted, would be constitutional as a non-voted amendment to Proposition 62
or as a non-voted change to Proposition 62's operative date.

Proposition 218. On November 5, 1996, the voters of the State
approved Proposition 218, a constitutional initiative, entitled the "Right
to Vote on Taxes Act" ("Proposition 218"). Proposition 218 adds Articles
XIII C and XIII D to the California Constitution and contains a number of
interrelated provisions affecting the ability of local governments to levy
and collect both existing and future taxes, assessments, fees and charges.
Proposition 218 became effective on November 6, 1996. The Sponsors are
unable to predict whether and to what extent Proposition 218 may be held to
be constitutional or how its terms will be interpreted and applied by the
courts. However, if upheld, Proposition 218 could substantially restrict
certain local governments' ability to raise future revenues and could
subject certain existing sources of revenue to reduction or repeal, and
increase local government costs to hold elections, calculate fees and
assessments, notify the public and defend local government fees and
assessments in court.

Article XIII C of Proposition 218 requires majority voter approval for
the imposition, extension or increase of general taxes and two-thirds voter
approval for the imposition, extension or increase of special taxes,
including special taxes deposited into a local government's general fund.
Proposition 218 also provides that any general tax imposed, extended or
increased without voter approval by any local government on or after
January 1, 1995 and prior to November 6, 1996 shall continue to be imposed
only if approved by a majority vote in an election held within two years of
November 6, 1996.

Article XIII C of Proposition 218 also expressly extends the
initiative power to give voters the power to reduce or repeal local taxes,
assessments, fees and charges, regardless of the date such taxes,
assessments, fees or charges were imposed. This extension of the
initiative power to some extent constitutionalizes the March 6, 1995 State
Supreme Court decision in Rossi v. Brown, which upheld an initiative that
repealed a local tax and held that the State constitution does not preclude
the repeal, including the prospective repeal, of a tax ordinance by an
initiative, as contrasted with the State constitutional prohibition on
referendum powers regarding statutes and ordinances which impose a tax.
Generally, the initiative process enables California voters to enact
legislation upon obtaining requisite voter approval at a general election.
Proposition 218 extends the authority stated in Rossi v. Brown by expanding
the initiative power to include reducing or repealing assessments, fees and
charges, which had previously been considered administrative rather than
legislative matters and therefore beyond the initiative power.

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The initiative power granted under Article XIII C of Proposition 218, by
its terms, applies to all local taxes, assessments, fees and charges and is
not limited to local taxes, assessments, fees and charges that are property
related.

Article XIII D of Proposition 218 adds several new requirements making
it generally more difficult for local agencies to levy and maintain
"assessments" for municipal services and programs. "Assessment" is defined
to mean any levy or charge upon real property for a special benefit
conferred upon the real property.

Article XIII D of Proposition 218 also adds several provisions
affecting "fees" and "charges" which are defined as "any levy other than an
ad valorem tax, a special tax, or an assessment, imposed by a local
government upon a parcel or upon a person as an incident of property
ownership, including a user fee or charge for a property related service."
All new and, after June 30, 1997, existing property related fees and
charges must conform to requirements prohibiting, among other things, fees
and charges which (i) generate revenues exceeding the funds required to
provide the property related service, (ii) are used for any purpose other
than those for which the fees and charges are imposed, (iii) are for a
service not actually used by, or immediately available to, the owner of the
property in question, or (iv) are used for general governmental services,
including police, fire or library services, where the service is available
to the public at large in substantially the same manner as it is to
property owners. Further, before any property related fee or charge may be
imposed or increased, written notice must be given to the record owner of
each parcel of land affected by such fee or charges. The local government
must then hold a hearing upon the proposed imposition or increase of such
property based fee, and if written protests against the proposal are
presented by a majority of the owners of the identified parcels, the local
government may not impose or increase the fee or charge. Moreover, except
for fees or charges for sewer, water and refuse collection services, no
property related fee or charge may be imposed or increased without majority
approval by the property owners subject to the fee or charge or, at the
option of the local agency, two-thirds voter approval by the electorate
residing in the affected area.

Proposition 87. On November 8, 1988, California voters approved
Proposition 87. Proposition 87 amended Article XVI, Section 16, of the
California Constitution by authorizing the California Legislature to
prohibit redevelopment agencies from receiving any of the property tax
revenue raised by increased property tax rates levied to repay bonded
indebtedness of local governments which is approved by voters on or after
January 1, 1989.

COLORADO

RISK FACTORS--Generally. The portfolio of the Colorado Trust consists
primarily of obligations issued by or on behalf of the State of Colorado
and its political subdivisions. The State's political subdivisions include
approximately 1,600 units of local government in Colorado, including
counties, statutory cities and towns, home-rule cities and counties, school
districts and a variety of water, irrigation, and other special districts
and special improvement districts, all with various degrees of
constitutional and statutory authority to levy taxes and incur
indebtedness.

Following is a brief summary of some of the factors which may affect the
financial condition of the State of Colorado and its political
subdivisions. It is not a complete or comprehensive description of these
factors or analysis of financial conditions and may not be indicative of
the financial condition of issuers of obligations contained in the
portfolio of the Colorado Trust or any particular projects financed by
those obligations. Many factors not included in the summary, such as the
national economy, social and environmental policies and conditions, and the
national and international markets for petroleum, minerals and metals,
could have an adverse impact on the financial condition of the State and
its

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political subdivisions, including the issuers of obligations contained in
the portfolio of the Colorado Trust. It is not possible to predict whether
and to what extent those factors may affect the financial condition of the
State and its political subdivisions, including the issuers of obligations
contained in the portfolio of the Colorado Trust. Prospective investors
should study with care the issues contained in the portfolio of the
Colorado Trust, review carefully the information set out in Part A of the
Prospectus under the caption "Colorado Risk Factors" and consult with their
investment advisors as to the merits of particular issues in the portfolio.

The following summary is based on publicly available information which
has not been independently verified by the Sponsor or its legal counsel.

The State Economy. The State's economic growth is estimated to have
surpassed that of the nation for the past nine consecutive years, including
1996. In recent years, above-average population growth and migration into
the State have helped the State to post better performance in income
growth, homebuilding and job creation. Per-capita income increased 21.99%
from 1992 through 1996. Retail trade sales increased 36.4% from 1992
through 1996.

Net migration into the State peaked in 1993 at 72,667 (an increase of
approximately 15.7% over 1992's net migration), with the overall State
population increasing 3.0% in 1993. Net migration into the State is
estimated to have been 45,216 in 1996 (a decrease of approximately 19.0%
from 1995's net migration of 55,854, but with the overall State population
still increasing approximately 2.0% in 1996. The State's job growth rate
was 4.5% in 1995, compared to 2.7% at the national level, and 3.4% for
1996, compared to 2.0% at the national level. 62,500 nonfarm jobs were
generated in the State economy in 1996, down from 78,500 in 1995. The
State's unemployment rate is estimated to have remained below the national
unemployment rate for 1996 and is estimated to have remained below the
national level in 1997.

State Revenues. The State operates on a fiscal year beginning July 1
and ending June 30. Fiscal year 1997 refers to the year ended June 30,
1997, and fiscal year 1998 refers to the year ended June 30, 1998.

The State derives substantially all of its General Fund revenues from
taxes. The two most important sources of these revenues are sales and use
taxes and individual income taxes, which accounted for approximately 30.5%
and 54.9%, respectively, of total net General Fund revenues during fiscal
year 1997. Based upon Office of State Planning and Budgeting figures it is
estimated that, during fiscal year 1998, sales and use taxes will account
for approximately 29.4% of total General Fund revenues and individual
income taxes will account for approximately 55.4% of total net General Fund
revenues. The ending General Fund balance, before statutory and
constitutional reserve requirements, for fiscal year 1997 was $375.1
million and for fiscal year 1998 is estimated at $325.0 million. After
allowances for such reserves the net amounts of fund balance at such dates
were $208.4 million and an estimated $141.1 million respectively.

The Colorado Constitution contains strict limitations on the ability
of the State to create debt except under certain very limited
circumstances. However, the constitutional provisions have been interpreted
not to limit the ability of the State or its political subdivisions to
issue certain obligations which do not constitute debt in the
constitutional sense, including short-term obligations which do not extend
beyond the fiscal year in which they are incurred and lease purchase
obligations which are made subject to annual appropriation.

The State is authorized pursuant to State statute to issue short-term
notes to alleviate temporary cash flow shortfalls. The most recent issue of
such notes, issued on July 1, 1997 and maturing June 26, 1998, was given
the highest rating available for short-term obligations by Standard &
Poor's Ratings Group a division of The McGraw-Hill Companies, Inc. and
Fitch Investors Service, Inc. Because of the short-term nature of such
notes, their ratings should not necessarily be considered indicative of the
State's general financial condition. It is not known whether the State will
issue similar short-term notes in 1998.

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Tax and Spending Limitation Amendment. On November 3, 1992, Colorado voters
approved a State constitutional amendment ("TABOR") that restricts the
ability of the State and local governments to increase taxes, revenues,
debt and spending. TABOR provides that its provisions supersede conflicting
State constitutional, State statutory, charter or other State or local
provisions.

The provisions of TABOR apply to "districts," which are defined in
TABOR as the State or any local government, with certain exclusions. Under
the terms of TABOR, districts must have prior voter approval to impose any
new tax, tax rate increase, mill levy increase, valuation for assessment
ratio increase or extension of an expiring tax. Prior voter approval is
also required, except in certain limited circumstances, for the creation of
"any multiple-fiscal year direct or indirect district debt or other
financial obligation." TABOR prescribes the timing and procedures for any
elections required by it.

Colorado appellate court cases decided since the adoption of TABOR
have resolved a number of questions concerning the required methods for
authorizing new indebtedness, the treatment of tax levies for existing
indebtedness and other purposes, the procedures for conducting elections
under TABOR, the ability of local governments to obtain voter approval for
the exclusion of certain revenues from the limitations on revenues and
spending, the ability of local governments to enter into annually-
appropriated lease purchase obligations without voter approval, and other
interpretive matters.

Because TABOR's voter approval requirements apply to any
"multiple-fiscal year" debt or financial obligation, short-term obligations
which do not extend beyond the fiscal year in which they are incurred are
treated as exempt from the voter approval requirements of TABOR. Case law
both prior to and after the adoption of TABOR held that obligations
maturing in the current fiscal year, as well as lease purchase obligations
subject to annual appropriation, do not constitute debt under the Colorado
Constitution.

TABOR's voter approval requirements and other limitations (discussed
in the following paragraph) do not apply to "enterprises," which term is
defined to include government-owned businesses authorized to issue their
own revenue bonds and receiving under 10% of annual revenue in grants from
all Colorado state and local governments combined. Enterprise status under
TABOR has been and is likely to continue to be subject to legislative and
judicial interpretation.

Among other provisions, TABOR requires the establishment of emergency
reserves, limits increases in district revenues and limits increases in
district fiscal year spending. As a general matter, annual State fiscal
year spending may change no more than inflation plus the percentage change
in State population in the prior calendar year. Annual local district
fiscal year spending may change no more than inflation in the prior
calendar year plus annual local growth, as defined in and subject to the
adjustments provided in TABOR. TABOR provides that annual district property
tax revenues may change no more than inflation in the prior calendar year
plus annual local growth, as defined in and subject to the adjustments
provided in TABOR. District revenues in excess of the limits prescribed by
TABOR are required, absent voter approval, to be refunded by any reasonable
method, including temporary tax credits or rate reductions. In addition,
TABOR prohibits new or increased real property transfer taxes, new State
real property taxes and new local district income taxes. TABOR also
provides that a local district may reduce or end its subsidies to any
program (other than public education through grade 12 or as required by
federal law) delegated to it by the State General Assembly for
administration.

The foregoing is not intended as a complete description of all of the
provisions of TABOR. Many provisions of TABOR are ambiguous and will
require judicial interpretation. Several statutes enacted or proposed in
the State General Assembly have attempted to clarify the application of
TABOR with respect to certain governmental entities and activities.
However, many provisions of TABOR are likely to continue to be the subject
of further legislation or judicial proceedings. The application of TABOR,
particularly in

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periods of slow or negative growth, may adversely affect the financial
condition and operations of the State and local governments in the State to
an extent which cannot be predicted.

CONNECTICUT

RISK FACTORS - The State Economy. Manufacturing has historically been
of prime economic importance to Connecticut. The manufacturing industry is
diversified, with transportation equipment (primarily aircraft engines,
helicopters and submarines) the dominant industry, followed by non-
electrical machinery, fabricated metal products, and electrical machinery.
As a result of a rise in employment in service-related industries and a
decline in manufacturing employment, manufacturing accounted for only 17.4%
of total non-agricultural employment in Connecticut in 1996. Defense-
related business represents a relatively high proportion of the
manufacturing sector. On a per capita basis, defense awards to Connecticut
have traditionally been among the highest in the nation, and reductions in
defense spending have had a substantial adverse impact on Connecticut's
economy.

The annual average unemployment rate (seasonally adjusted) in
Connecticut increased from a low of 3.0% in 1988 to a high of 7.5% in 1992
and, after a number of important changes in the method of calculation, was
reported to be 5.8% in 1996. However, pockets of significant unemployment
and poverty exist in some of Connecticut's cities and towns.

State Revenues and Expenditures. At the end of the 1990-91 fiscal
year, the General Fund had an accumulated unappropriated deficit of
$965,712,000. For the six fiscal years ended June 30, 1997, the General
Fund recorded operating surpluses, based on the State's budgetary method of
accounting, of approximately $110,200,000, $113,500,000, $19,700,000,
$80,500,000, $250,000,000, and $262,600,000, respectively. General Fund
budgets for the biennium ending June 30, 1999, were adopted in 1997.
General Fund expenditures and revenues are budgeted to be approximately
$9,550,000,000 and $9,700,000,000 for the 1997-98 and 1998-99 fiscal years,
respectively, an increase of more than 35% from the budgeted expenditures
of approximately $7,008,000,000 for the 1991-92 fiscal year.

State Debt. During 1991 the State issued a total of $965,710,000
Economic Recovery Notes, of which $157,055,000 were outstanding as of
December 1, 1997. The notes were to be payable no later than June 30,
1996, but as part of the budget adopted for the biennium ending June 30,
1997, payment of the notes scheduled to be paid during the 1995-96 fiscal
year was rescheduled to be made over the four fiscal years ending June 30,
1999.

The primary method for financing capital projects by the State is
through the sale of the general obligation bonds of the State. These bonds
are backed by the full faith and credit of the State. As of December 1,
1997, there was a total legislatively authorized bond indebtedness of
$11,460,239,000, of which $10,159,950,000 had been approved for issuance by
the State Bond Commission and $9,181,272,000 had been issued. As of
December 1, 1997, State direct general obligation indebtedness outstanding
was $6,475,986,251.

In 1995, the State established the University of Connecticut as a
separate corporate entity to issue bonds and construct certain
infrastructure improvements. The improvements are to be financed by $18
million of general obligation bonds of the State and $962 million bonds of
the University. The University's bonds will be secured by a State debt
service commitment, the aggregate amount of which is limited to $382
million for the four fiscal years ending June 30, 1999, and $580 million
for the six fiscal years ending June 30, 2005.

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In addition, the State has limited or contingent liability on a significant
amount of other bonds. Such bonds have been issued by the following quasi-
public agencies: the Connecticut Housing Finance Authority, the Connecticut
Development Authority, the Connecticut Higher Education Supplemental Loan
Authority, the Connecticut Resources Recovery Authority and the Connecticut
Health and Educational Facilities Authority. Such bonds have also been
issued by the cities of Bridgeport and West Haven and the Southeastern
Connecticut Water Authority. As of February 4, 1998, the amount of bonds
outstanding on which the State has limited or contingent liability totaled
$4,000,900,000.

To meet the need for reconstructing, repairing, rehabilitating and
improving the State transportation system (except Bradley International
Airport), the State adopted legislation which provides for, among other
things, the issuance of special tax obligation ("STO") bonds the proceeds
of which will be used to pay for improvements to the State's transportation
system. The STO bonds are special tax obligations of the State payable
solely from specified motor fuel taxes, motor vehicle receipts, and
license, permit and fee revenues pledged therefor and deposited in the
special transportation fund, which was established to budget and account
for such revenues.

As of December 1, 1997, the General Assembly had authorized STO bonds
for the program in the aggregate amount of $4,302,700,000, of which
$3,894,700,000 of new money borrowings had been issued. It is anticipated
that additional STO bonds will be authorized by the General Assembly
annually in an amount necessary to finance and to complete the
infrastructure program. Such additional bonds may have equal rank with the
outstanding bonds provided certain pledged revenue coverage requirements of
the STO indenture controlling the issuance of such bonds are met. The State
expects to continue to offer bonds for this program.

The State's general obligation bonds are rated AA- by Standard &
Poor's and Aa3 by Moody's. On March 7, 1995, Fitch reduced its rating of
the State's general obligation bonds from AA+ to AA.

Litigation. The State, its officers and its employees are defendants
in numerous lawsuits. Although it is not possible to determine the outcome
of these lawsuits, the Attorney General has opined that an adverse decision
in any of the following cases might have a significant impact on the
State's financial position: (i) a class action by the Connecticut Criminal
Defense Lawyers Association claiming a campaign of illegal surveillance
activity and seeking damages and injunctive relief; (ii) an action on
behalf of all persons with traumatic brain injury, claiming that their
constitutional rights are violated by placement in State hospitals alleged
not to provide adequate treatment and training, and seeking placement in
community residential settings with appropriate support services; and (iii)
litigation involving claims by Indian tribes to a portion of the State's
land area.

As a result of litigation on behalf of black and Hispanic school
children in the City of Hartford seeking "integrated education" within the
Greater Hartford metropolitan area, on July 9, 1996, the State Supreme
Court directed the legislature to develop appropriate measures to remedy
the racial and ethnic segregation in the Hartford public schools. The
fiscal impact of this decision might be significant but is not determinable
at this time.

Municipal Debt Obligations. General obligation bonds issued by
municipalities are usually payable from ad valorem taxes on property
subject to taxation by the municipality. A municipality's property tax base
is subject to many factors outside the control of the municipality,
including the decline in Connecticut's manufacturing industry. Certain
Connecticut municipalities have experienced severe fiscal difficulties and
have reported operating and accumulated deficits in recent years. The most
notable of these is the City of Bridgeport, which filed a bankruptcy
petition on June 7, 1991. The State opposed the petition. The United States
Bankruptcy Court for the District of Connecticut held that Bridgeport has
authority to file such a petition but that its petition should be dismissed
on the grounds that Bridgeport was not insolvent when the

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petition was filed. State legislation enacted in 1993 prohibits municipal
bankruptcy filings without the prior written consent of the Governor.

In addition to general obligation bonds backed by the full faith and
credit of the municipality, certain municipal authorities may issue bonds
that are not considered to be debts of the municipality. Such bonds may
only be repaid from the revenues of projects financed by the municipal
authority, which revenues may be insufficient to service the authority's
debt obligations.

Regional economic difficulties, reductions in revenues, and increased
expenses could lead to further fiscal problems for the State and its
political subdivisions, authorities, and agencies. This could result in
declines in the value of their outstanding obligations, increases in their
future borrowing costs, and impairment of their ability to pay debt service
on their obligations.

FLORIDA

The Portfolio of the Florida Trust contains different issues of
long-term debt obligations issued by or on behalf of the State of Florida
(the "State") and counties, municipalities and other political subdivisions
and public authorities thereof or by the Government of Puerto Rico or the
Government of Guam or by their respective authorities, all rated in the
category A or better by at least one national rating organization (See
Investment Summary in Part A of the Prospectus). Investment in the Florida
Trust should be made with an understanding that the value of the underlying
Portfolio may decline with increases in interest rates.

RISK FACTORS--The State Economy. In 1980 Florida ranked seventh among
the fifty states with a population of 9.7 million people. The State has
grown dramatically since then and, as of April 1, 1996, ranked fourth with
an estimated population of 14.4 million. Since the beginning of the
eighties, Florida has surpassed Ohio, Illinois and Pennsylvania in total
population. Florida's attraction, as both a growth and retirement state,
has kept net migration at an average of 224,240 new residents per year,
from 1987 through 1996. Since 1987 the prime working age population (18-44)
has grown at an average annual rate of 2.1%. The share of Florida's total
working age population (18-59) to total State population is approximately
54%. Non-farm employment has grown by over 35.6% since 1987. Total non-farm
employment in Florida is expected to increase 3.9% in 1997-98 and rise 2.6%
in 1998-99. By the end of 1997-98, non-farm employment in the State is
expected to reach an average of 6.7 million jobs. The service sector is
Florida's largest employment sector, presently accounting for nearly 87% of
total non-farm employment. Employment in the service sector should
experience an increase of 4.8% in 1997-98, while growing 4.1% in 1998-99.
Manufacturing jobs in Florida are concentrated in the area of high-tech and
value-added sectors, such as electrical and electronic equipment, as well
as printing and publishing. Florida's manufacturing sector has kept pace
with the U.S., at about 2.6% of total U.S. manufacturing employment since
the beginning of the nineties. Foreign trade has contributed significantly
to Florida's employment growth. Trade is expected to expand 3.7% this year
and 2.3% next year. Florida's dependence on highly cyclical construction
and construction related manufacturing has declined. Total contract
construction employment as a share of total non-farm employment reached a
peak of 10% in 1973. In 1980 the share was roughly 7.5%, and in 1996 the
share had edged downward to 5%. Although the job creation rate for the
State of Florida since 1987 is almost twice the rate for the nation as a
whole, throughout most of the 1980's the unemployment rate for the State
has tracked below that of the nation's. In the nineties, the trend was
reversed until 1995 and 1996, when the state's unemployment rate again
tracked below the U.S. The average rate of unemployment for Florida since
1987 is 6.2%, while the national average is also 6.2%. Florida's
unemployment rate is forecasted at 4.6% in 1997-98 and 4.8% in 1998-99.
Because Florida has a proportionately greater retirement age population,
property income (dividends, interest and rent) and transfer payments
(Social Security and pension benefits) are a relatively more important
source of income. In 1995, Florida's employment income represented 60.6% of
total personal income, while nationally, employment income represented
70.8% of

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total personal income. From 1985 through 1995, Florida's total nominal
personal income grew by 103% and per capita income expanded approximately
62.5%. For the nation, total and per capital personal income increased by
roughly 77.8% and 61.0%, respectively. Real personal income in Florida is
estimated to increase 5.2% in 1997-98 and increase 3.7% in 1998-99, while
real personal income per capita in the State is projected to grow at 3.2%
in 1997-98 and 1.8% in 1998-99.

The ability of the State and its local units of government to satisfy
the Debt Obligations may be affected by numerous factors which impact on
the economic vitality of the State in general and the particular region of
the State in which the issuer of the Debt Obligation is located. South
Florida is particularly susceptible to international trade and currency
imbalances and to economic dislocations in Central and South America, due
to its geographical location and its involvement with foreign trade,
tourism and investment capital. The central and northern portions of the
State are impacted by problems in the agricultural sector, particularly
with regard to the citrus and sugar industries. Short-term adverse
economic conditions may be created in these areas, and in the State as a
whole, due to crop failures, severe weather conditions or other
agriculture-related problems. The State economy also has historically been
somewhat dependent on the tourism and construction industries and is
sensitive to trends in those sectors.

The State Budget. Florida prepares an annual budget which is
formulated each year and presented to the Governor and Legislature. Under
the State Constitution and applicable statutes, the State budget as a
whole, and each separate fund within the State budget, must be kept in
balance from currently available revenues during each State fiscal year.
(The State's fiscal year runs from July 1 through June 30). The Governor
and the Comptroller of the State are charged with the responsibility of
ensuring that sufficient revenues are collected to meet appropriations and
that no deficit occurs in any State fund.

The financial operations of the State covering all receipts and
expenditures are maintained through the use of four types of funds: the
General Revenue Fund, Trust Funds, the Working Capital Fund and the Budget
Stabilization Fund. The majority of the State's tax revenues are deposited
in the General Revenue Fund and monies for all funds are expended pursuant
to appropriations acts. In fiscal year 1996-97, expenditures for education,
health and welfare and public safety represented approximately 53%, 26% and
14%, respectively, of expenditures from the General Revenue Fund. The Trust
Funds consist of monies received by the State which under law or trust
agreement are segregated for a purpose authorized by law. Revenues in the
General Revenue Fund which are in excess of the amount needed to meet
appropriations may be transferred to the Working Capital Fund.

State Revenues. For fiscal year 1997-98 the estimated General Revenue
plus Working Capital Fund and Budget Stabilization funds total $18,150.9
million, an 8.5% increase over 1996-97. The $16,598.5 million in Estimated
Revenues represent an increase of 5.7% over the analogous figure in 1996-
1997. With combined General Revenue, Working Capital Fund and Budget
Stabilization Fund appropriations at $17,114.0 million, unencumbered
reserves at the end of 1996-97 are estimated at $1,036.9 million. For
fiscal year 1998-99, the estimated General Revenue plus Working Capital and
Budget Stabilization funds available total $18,644.0 million, a 2.7%
increase over 1997-98. The $17,405.5 million in Estimated Revenues
represent a 4.9% increase over the analogous figure in 1997-98.

In fiscal year 1996-97, the State derived approximately 67% of its
total direct revenues for deposit in the General Revenue Fund, Trust Funds,
Working Capital Fund and Budget Stabilization Fund from State taxes and
fees. Federal funds and other special revenues accounted for the remaining
revenues. The largest single source of tax receipts in the State is the 6%
sales and use tax. For the fiscal year ended June 30, 1996, receipts from
the sales and use tax totaled $12,089 million, an increase of 5.5% from
fiscal year 1996-97. The second largest source of State tax receipts is the
tax on motor fuels including the tax receipts distributed to local
governments. Receipts from the taxes on motor fuels are almost entirely
dedicated to trust funds for specific purposes or transferred to local
governments and are not included in the General Revenue Fund.

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Preliminary data for the fiscal year ended June 30, 1997, show collections
of this tax totaled $2,012.0 million.

The State currently does not impose a personal income tax. However,
the State does impose a corporate income tax on the net income of
corporations, organizations, associations and other artificial entities for
the privilege of conducting business, deriving income or existing within
the State. For the fiscal year ended June 30, 1997, receipts from the
corporate income tax totaled $1,362.3 million, an increase of 17.2% from
fiscal year 1995-96. The Documentary Stamp Tax collections totaled $844.2
million during fiscal year 1996-97, posting a 8.9% increase from the
previous fiscal year. The Alcoholic Beverage Tax, an excise tax on beer,
wine and liquor totaled $447.2 million in fiscal year 1996-97 The Florida
lottery produced sales of $2.09 billion in fiscal year 1996-97 of which
$792.3 million was used for education purposes.

While the State does not levy ad valorem taxes on real property or
tangible personal property, counties, municipalities and school districts
are authorized by law, and special districts may be authorized by law, to
levy ad valorem taxes. Under the State Constitution, ad valorem taxes may
not be levied by counties, municipalities, school districts and water
management districts in excess of the following respective millages upon
the assessed value of real estate and tangible personal property: for all
county, municipal or school purposes, ten mills; and for water management
districts no more than 0.05 mill or 1.0 mill, depending upon geographic
location. These millage limitations do not apply to taxes levied for
payment of bonds and taxes levied for periods not longer than two years
when authorized by a vote of the electors. (Note: one mill equals one-tenth
of one cent.)

The State Constitution and statutes provide for the exemption of
homesteads from certain taxes. The homestead exemption is an exemption from
all taxation, except for assessments for special benefits, up to a specific
amount of the assessed valuation of the homestead. This exemption is
available to every person who has the legal or equitable title to real
estate and maintains thereon his or her permanent home. All permanent
residents of the State are currently entitled to a $25,000 homestead
exemption from levies by all taxing authorities, however, such exemption is
subject to change upon voter approval.

As of January 1, 1994, the property valuations for homestead property
are subject to a growth cap of the lesser of 3% or the change in the
Consumer Price Index during the relevant year, except in the event of a
sale thereof during such year, and except as to improvements thereto during
such year. If the property changes ownership or homestead status, it is to
be re-valued at full just value on the next tax roll.

Since municipalities, counties, school districts and other special
purpose units of local governments with power to issue general obligation
bonds have authority to increase the millage levy for voter approved
general obligation debt to the amount necessary to satisfy the related debt
service requirements, the property valuation growth cap is not expected to
adversely affect the ability of these entities to pay the principal of or
interest on such general obligation bonds. However, in periods of high
inflation, those local government units whose operating millage levies are
approaching the constitutional cap and whose tax base consists largely of
residential real estate, may, as a result of the above-described property
valuation growth cap, need to place greater reliance on non-ad valorem
revenue sources to meet their operating budget needs.

At the November 1994 general election, voters approved an amendment to
the State Constitution that limits the amount of taxes, fees, licenses and
charges imposed by the Legislature and collected during any fiscal year to
the amount of revenues allowed for the prior fiscal year, plus an
adjustment for growth. The revenue limit is determined by multiplying the
average annual rate of growth in Florida personal income over the previous
five years times the maximum amount of revenues permitted under the cap for
the prior fiscal year. The revenues allowed for any fiscal year can be
increased by a two-thirds vote of the Legislature. The limit was effective
starting with fiscal year 1995-96 based on actual revenues from fiscal year
1994-95.

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Any excess revenues generated will be deposited in the Budget Stabilization
Fund. Included among the categories of revenues which are exempt from the
proposed revenue limitation, however, are revenues pledged to state bonds.

State General Obligation Bonds and State Revenue Bonds. The State
Constitution does not permit the State to issue debt obligations to fund
governmental operations. Generally, the State Constitution authorizes State
bonds pledging the full faith and credit of the State only to finance or
refinance the cost of State fixed capital outlay projects, upon approval by
a vote of the electors, and provided that the total outstanding principal
amount of such bonds does not exceed 50% of the total tax revenues of the
State for the two preceding fiscal years. Revenue bonds may be issued by
the State or its agencies without a vote of the electors only to finance or
refinance the cost of State fixed capital outlay projects which are payable
solely from funds derived directly from sources other than State tax
revenues.

Exceptions to the general provisions regarding the full faith and
credit pledge of the State are contained in specific provisions of the
State Constitution which authorize the pledge of the full faith and credit
of the State, without electorate approval, but subject to specific coverage
requirements, for: certain road projects, county education projects, State
higher education projects, State system of Public Education and
construction of air and water pollution control and abatement facilities,
solid waste disposal facilities and certain other water facilities.

Local Bonds. The State Constitution provides that counties, school
districts, municipalities, special districts and local governmental bodies
with taxing powers may issue debt obligations payable from ad valorem
taxation and maturing more than 12 months after issuance, only (i) to
finance or refinance capital projects authorized by law, provided that
electorate approval is obtained; or (ii) to refund outstanding debt
obligations and interest and redemption premium thereon at a lower net
average interest cost rate.

Counties, municipalities and special districts are authorized to issue
revenue bonds to finance a variety of self-liquidating projects pursuant to
the laws of the State, such revenue bonds to be secured by and payable from
the rates, fees, tolls, rentals and other charges for the services and
facilities furnished by the financed projects. Under State law, counties
and municipalities are permitted to issue bonds payable from special tax
sources for a variety of purposes, and municipalities and special districts
may issue special assessment bonds.

Bond Ratings. General obligation bonds of the State are currently
rated Aa2 by Moody's, AA by Standard & Poor's, and AA by Fitch Investors
Services, Inc.

Litigation. Due to its size and its broad range of activities, the
State (and its officers and employees) are involved in numerous routine
lawsuits. The managers of the departments of the State involved in such
routine lawsuits believe that the results of such pending litigation would
not materially affect the State's financial position. In addition to the
routine litigation pending against the State, its officers and employees,
the following lawsuits and claims are also pending:

A. In an inverse condemnation suit, plaintiff claims that the action
of State constitutes a taking of plaintiff's leases for which compensation
is due. The Circuit judge granted the State's motion for summary judgment
finding that as a matter of law, the State had not deprived plaintiff of
any royalty rights. Plaintiff appealed to the First District Court of
Appeals, but the case was remanded to the Circuit Court for trial. Final
judgment was made in favor of the State; however plaintiff has filed for a
review by The Florida Supreme Court.

B. In a challenge by plaintiffs to the constitutionality of the $295
impact fee imposed by Florida law on the issuance of certificates of title
for vehicles previously titled outside the State, the Court granted

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summary judgment to the plaintiff finding the fee violated the commerce
clause of the U.S. Constitution. In an appeal to the State Supreme Court by
the State, the Court ordered full refunds to all those who paid the impact
fee since the Statute came into existence in 1991. Refunds of approximately
$188 million were made. Litigation pertaining to post judgment interest is
still active.

C. The Florida Department of Transportation has filed an action
against owners of property adjoining property that is subject to a claim by
the U.S. Environmental Protection Agency, seeking a declaratory judgment
that the Department is not the owner of such property. The case was
dismissed and FDOT's appeal of the order of dismissal is pending in the
Third District Court of Appeal. The EPA has agreed to await the outcome of
the Department's declaratory action before proceeding further. If the
Department's action is not successful, the possible clean-up costs could
exceed $25 million.

D. In a class action suit on behalf of clients of residential
placement for the developmentally disabled seeking refunds for services
where children were entitled to free education under the Education for
Handicapped Act, the District court held that the State could not charge
maintenance fees for children between the ages of 5 and 17 based on the
Act. All appeals have been exhausted. The State's potential cost of
refunding these charges could exceed $42 million. However, attorneys are in
the process of negotiating a settlement amount.

E. In an action challenging the constitutionality of the Public
Medical Assistance Trust Fund annual assessment on net operating revenue of
free-standing out-patient facilities offering sophisticated radiology
services, a trial has not been scheduled. If the State does not prevail,
the potential refund liability could be approximately $70 million.

F. In an action against the Florida Department of Corrections,
plaintiffs seek a declaratory judgment that they are not exempt employees
under the Fair Labor Standards Act and that, therefore, they are entitled
to certain overtime compensation. The U.S. District Court entered an order
dismissing the case for lack of jurisdiction. Plaintiffs filed a lawsuit
against the Department at the State level making the same allegations
previously made at the federal level. The State court determined it has
jurisdiction over the FLSA claim. The Court entered final summary
judgement. The plaintiffs were not awarded overtime pay at time and one-
half nor liquidated damages; however, they were awarded attorney's fees and
costs.

G. In an action challenging whether Florida's statute for dealer
repossessions authorizes the Department of Revenue to grant a refund to a
financial institution as the assignee of numerous security agreements
governing the sale of automobiles and other property sold by dealers, the
question turns on whether the Legislature intended the statute only to
provide a refund or credit to the dealer who actually sold the tangible
personal property and collected and remitted the tax or intended that right
to be assignable. Several banks have applied for refunds; the potential
refund to financial institutions exceeds $30,000,000.

Summary. Many factors including national, economic, social and
environmental policies and conditions, most of which are not within the
control of the State or its local units of government, could affect or
could have an adverse impact on the financial condition of the State.
Additionally, the limitations placed by the State Constitution on the State
and its local units of government with respect to income taxation, ad
valorem taxation, bond indebtedness and other matters, discussed above, as
well as other applicable statutory limitations, may constrain the
revenue-generating capacity of the State and its local units of government
and, therefore, the ability of the issuers of the Debt Obligations to
satisfy their obligations thereunder.

The Sponsors believe that the information summarized above describes
some of the more significant matters relating to the Florida Trust. For a
discussion of the particular risks with each of the Debt Obligations, and
other factors to be considered in connection therewith, reference should be
made to the Official Statement and other offering materials relating to
each of the Debt Obligations included in the

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portfolio of the Florida Trust. The foregoing information regarding the
State, its political subdivisions and its agencies and authorities
constitutes only a brief summary, does not purport to be a complete
description of the matters covered and is based solely upon information
drawn from official statements relating to offerings of certain bonds of
the State. The Sponsors and their counsel have not independently verified
this information, and the Sponsors have no reason to believe that such
information is incorrect in any material respect. None of the information
presented in this summary is relevant to Puerto Rico or Guam Debt
Obligations which may be included in the Florida Trust.

For a general description of the risks associated with the various
types of Debt Obligations comprising the Florida Trust, see the discussion
under "Risk Factors", above.

GEORGIA

RISK FACTORS--The following discussion regarding the financial
condition of the State government may not be relevant to general obligation
or revenue bonds issued by political subdivisions of and other issuers in
the State of Georgia (the "State"). Such financial information is based
upon information about general financial conditions that may or may not
affect individual issuers of obligations within the State. Since 1973 the
State's long-term debt obligations have been issued in the form of general
obligation debt or guaranteed revenue debt. Prior to 1973 all of the
State's long-term debt obligations were issued by ten separate State
authorities and secured by lease rental agreements between such authorities
and various State departments and agencies. Currently, Moody's Investors
Service, Inc. and Fitch Investors Service, Inc. rate Georgia general
obligation bonds AAA and, as of July 1997, Standard & Poor's Corporation
rates such bonds AAA. There can be no assurance that the economic and
political conditions on which these ratings are based will continue or that
particular bond issues may not be adversely affected by changes in
economic, political or other conditions that do not affect the above
ratings. State Treasury Receipts of 11.9 billion for fiscal year 1997
increased over fiscal year 1996 by 6.62% and estimated State Treasury
Receipts for fiscal year 1998 are expected to increase by 5.3% according to
the Governor's chief economist..

In addition to general obligation debt, the Georgia Constitution
permits the issuance by the State of certain guaranteed revenue debt. The
State may incur guaranteed revenue debt by guaranteeing the payment of
certain revenue obligations issued by an instrumentality of the State. The
Georgia Constitution prohibits the incurring of any proposed general
obligation debt or guaranteed revenue debt if the highest aggregate annual
debt service requirement for the then current year or any subsequent fiscal
year for outstanding authority debt, guaranteed revenue debt, and general
obligation debt, including the proposed debt, exceed 10% of the total
revenue receipts, less refunds, of the State treasury in the fiscal year
immediately preceding the year in which any proposed debt is to be
incurred. As of July 1997, the total principal indebtedness of the State of
Georgia consisting of general obligation debt, guaranteed revenue debt and
remaining authority debt totalled $5,070,895,000 and the highest aggregate
annual payment for such debt equaled 5.39% of fiscal 1997 State estimated
treasury receipts.

The Georgia Constitution also permits the State to incur public debt
to supply a temporary deficit in the State treasury in any fiscal year
created by a delay in collecting the taxes of that year. Such debt must not
exceed, in the aggregate, 5% of the total revenue receipts, less refunds,
of the State treasury in the fiscal year immediately preceding the year in
which such debt is incurred. The debt incurred must be repaid on or before
the last day of the fiscal year in which it is to be incurred out of the
taxes levied for that fiscal year. No such debt may be incurred in any
fiscal year if there is then outstanding unpaid debt from any previous
fiscal year which was incurred to supply a temporary deficit in the State
treasury. No such short-term debt has been incurred under this provision
since the inception of the constitutional authority referred to in this
paragraph.

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The State operates on a fiscal year beginning July 1 and ending June 30.
For example, "fiscal 1997" refers to the year ended June 30, 1997. In July
1997, the State estimated that fiscal 1998 revenue collections would be
$11,777,578,880 with an estimated increase of 4.01% over collections for
the previous fiscal year.

Virtually all of the issues of long-term debt obligations issued by or
on behalf of the State of Georgia and counties, municipalities and other
political subdivisions and public authorities thereof are required by law
to be validated and confirmed in a judicial proceeding prior to issuance.
The legal effect of an approved validation in Georgia is to render
incontestable the validity of the pertinent bond issue and the security
therefor.

Based on data of the Georgia Department of Revenue for fiscal 1997,
income tax receipts and sales tax receipts of the State for fiscal 1997
comprised approximately 46% and 36.4%, respectively, of the total State tax
revenues.

The unemployment rate of the civilian labor force in the State as of
May 1997 was 4.4% according to data provided by the Georgia Department of
Labor. The Metropolitan Atlanta area, which is the largest employment
center in the area comprised of Georgia and its five bordering states and
which accounts for approximately 46% of the State's population, has for
some time enjoyed a lower rate of unemployment than the State considered as
a whole. In descending order, services, wholesale and retail trade,
manufacturing, government and transportation comprise the largest sources
of employment within the State.

The State from time to time is named as a party in certain lawsuits,
which may or may not have a material adverse impact on the financial
position of the State if decided in a manner adverse to the State's
interests. Certain of such lawsuits which could have a significant impact
on the State's financial position are summarized below.

Age International, Inc. v. State (two cases). Two suits for refund
have been filed in state court against the State of Georgia by out-of-state
producers of alcoholic beverages. The first suit for refund seeks 96
million dollars in refunds of alcohol taxes, plus interest, imposed under
Georgia's post-Bacchus (468 U.S. 263) statute, O.C.G.A. Sec. 3-4-60., i.e.,
as amended in 1985. These claims constitute 99% of all such taxes paid
during the 3 years preceding these claims. In addition, the claimants have
filed a second suit for refund for an additional 23 million dollars, plus
interest, for later time periods. These two cases encompass all known or
anticipated claims for refund of such type within the apparently applicable
statute of limitations for the years in question, i.e., 1989 through
January 1993. The cases are pending in the trial court at the discovery
stage.

DeKalb County v. Schrenko. This suit, originally filed in Federal
District Court for the Northern District of Georgia, against the State
School Superintendent and the State of Georgia is based on a claim that the
State's funding formula for pupil transportation is unconstitutional and a
local school board's claim that the State should finance the major portion
of the costs of its desegregation program. The Plaintiffs are seeking
approximately $67,500,000 in restitution. The Federal District Court ruled
that the State's funding formula for pupil transportation is contrary to
state law but ruled in the State's favor on the school desegregation costs
issue. Motions to reconsider and amend the Court's judgment were filed by
both parties. The State's motion was granted, in part, which reduced the
required state payment to approximately $28,000,000, as of the date of
decision. Notices of appeal and briefs to the Eleventh Circuit Court of
Appeals were filed by both sides, and oral arguments on appeal were heard
in October, 1996. In April, 1997, a three-judge panel of the Eleventh
Circuit Court of Appeals rendered a decision, affirming the trial court's
decision in the State's favor as to school desegregation costs issue and
reversing the trial court's decision against the State as to the State's
funding formula for pupil transportation being contrary to state law, 109
F.3d 680 (11th Cir. 1997). Thus, under the Eleventh Circuit panel's
decision, the State has no liability. On

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April 28, 1997, the Plaintiffs filed a motion for rehearing and en banc
consideration, and that motion is still pending. The State intends to
continue to defend the suit vigorously.

George Jackson, et al. v. Georgia Lottery Corporation. Plaintiffs
seek a court order declaring that two games sponsored by the Georgia
Lottery Corporation, "Quick Cash" and "Cash Three," are unconstitutional
and enjoining the lottery from further offering of these games. Plaintiffs
also seek the return of all monies played on these games during a specified
period, approximately $1,703,462,781. As a preliminary matter, the Court
has ruled that the plaintiffs would not be legally entitled to the monies
claimed. The plaintiffs have attempted to appeal. Any judgment against
the Georgia Lottery Corporation would not be satisfied from the State's
general fund. See O.C.G.A. Sec. 50-27-32(c).

Pursuant to a review of the Georgia Department of Revenue's revenue
collection information systems by the State Auditor, it was determined that
from April, 1995 to May, 1996 the Department did not maintain an adequate
accounting system to determine the accuracy of the amounts of Local Option
Sales Tax, Special Purpose Local Option Sales Tax and MARTA Sales Tax
collected by the Department on behalf of local governments and the
disbursements of those taxes to local governments imposing the sales-based
taxes. The Department of Revenue during this period estimated collections
and disbursements to local governments by reviewing the payment pattern to
the local governments for the previous twenty-four month period and
followed that pattern, adjusting for known growth in sales tax collections.
The Department is working to correct this situation and has ceased using
estimates for making payments to the local governments. Additionally,
during this same period, a review of the Department of Revenue's computer
processing systems revealed significant internal control weaknesses.
Procedures are being studied to correct these problems.

As a result of the findings by the State Auditor, a task force
appointed by the Governor in September 1996 engaged KPMG Peat Marwick to
make recommendations to modernize the Department of Revenue's revenue
collection system. Peat Marwick has completed its study and the
implementation of its recommendations is underway. The Governor requested
and the legislature approved expenditures of $15,000,000 in the Amended
Fiscal Year 1997 budget and $6,000,000 was requested and approved in the
Fiscal Year 1998 budget to begin the process of updating the Revenue
Department's computer system.

The Sponsors believe that the information summarized above describes
some of the more significant matters relating to the Georgia Trust. The
sources of the information are the official statements of issuers located
in Georgia, other publicly available documents and oral statements from
various federal and State agencies. The Sponsors and their counsel have not
independently verified any of the information contained in the official
statements, other publicly available documents or oral statements from
various State agencies and counsel have not expressed any opinion regarding
the completeness or materiality of any matters contained in this Prospectus
other than the tax opinions set forth below relating to the status of
certain tax matters in Georgia.

ILLINOIS

RISK FACTORS--As of the end of fiscal year 1997 the State of Illinois
reported overall a GAAP basis excess of revenues over expenditures of $500
million, the greatest excess reported in over 10 years. Although the State
continued to run a year-end deficit in its General Fund, at June 30, 1997
the General Fund deficit was reduced to $451 million compared to a deficit
of $952 million at June 30, 1996. The State's total assets of over $78
billion was an increase of about $10.3 billion largely attributable to an
$8.7 billion increase in the State's pension funds due to an accounting
change requiring reporting of those assets at fair value. During fiscal
year 1997 the State funded all of its retirement plans in accordance with
the 1996 statute requiring full funding over a 50-year period with a 15-
year phase-in. Although retirement plan funding was

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in an amount sufficient to comply with statutory requirements, it fell
short of the more stringent 40-year funding required by applicable
accounting rules.

The State has traditionally taken the position that the minimum
available General Fund balance necessary to meet the State's daily payout
needs in a timely manner is $200 million. During fiscal year 1996 the end-
of-month General Fund available balances were approximately at or above the
$200 million dollar mark in 11 of the 12 months. The financial community,
however, generally believes that 4%-5% of the State's 15-month budgetary
expenditures (taking into account lapse period spending) is a more adequate
working balance. In that regard, the State's end-of-month General Fund
balance for June of 1997 was above the 4% threshold for the first month
since fiscal year 1990. The General Fund balance of $806 million on June
30, 1997 was the highest in State history.

Certain non-home rule units of government within the State are subject
to a cap on property tax increases. The cap limits increases in property
tax extensions to the lesser of 5% or the rate of inflation as measured by
the Consumers Price Index.

In 1988, the Illinois General Assembly approved the Retail Rate Act
which provided a state subsidy for Illinois waste-to-power incinerators.
Following passage of that legislation, bonds were issued to finance certain
facilities which were expected to be repaid from the revenue of the state
subsidized electricity sales. On March 14, 1996, legislation was enacted to
repeal the Retail Rate Act without transition rules to preserve the state
subsidy for outstanding bond issues. As a result of the loss of the state
subsidy, there may not be sufficient revenues to repay the bonds issued to
finance the waste-to-power incinerators. Lawsuits against the State have
been filed in response to the repeal of the Retail Rate Act.

In May, 1997, a Cook County (Illinois) Circuit Court ruled that the
Illinois State Toll Highway Authority had violated the Illinois State
Constitution by failing to submit its annual budget to the General Assembly
for approval. The court issued a preliminary injunction instructing the
Tollway Authority to submit its current budget to the General Assembly for
approval on or before December 15, 1997. On November 25, 1997, the State
Supreme Court stayed the Circuit Court's order until further notice. When
the State General Assembly adjourned in 1997, no action had been taken to
resolve the budget situation for the Tollway Authority. The trustee for
the outstanding bond issues has stated that requiring General Assembly
approval of the Tollway Authority budget could constitute a technical
default under the indenture pursuant to which the outstanding bonds were
issued. Rating agencies have placed the bonds of the Tollway Authority on
a credit watch. Moreover, the rating agencies have stated that loss of
autonomy with respect to its budget could cause a downgrade in the long-
term debt rating issued to the Tollway Authority (the rating is separate
from the rating of Illinois general obligation debt). The decision of the
Cook County Circuit Court is currently on appeal.

General obligation bonds of the State of Illinois are currently rated
Aa3 by Moody's, upgraded from A1 in February, 1997, and AA by Standard &
Poor's, upgraded from AA- in July, 1997.

LOUISIANA

RISK FACTORS. The following discussion regarding the financial
condition of the State government may not be relevant to general obligation
or revenue bonds issued by political subdivisions of and other issuers in
the State of Louisiana (the "State"). Such financial information is based
upon information about general financial conditions that may or may not
affect issuers of the Louisiana obligations. The Sponsors have not
independently verified any of the information contained in such publicly
available documents, but are not aware of any facts which would render such
information inaccurate.

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In July, 1995 Standard & Poor's downgraded the rating the State received
for its general obligation bonds from A to A-. Standard & Poor's cited
problems with the State's Medicaid program as the primary factor in its
decision. The current Moody's rating on the State's general obligation
bonds was not downgraded and remains at Baaa1. There can be no assurance
that the economic conditions on which these ratings were based will
continue or that particular bond issues may not be adversely affected by
changes in economic or political conditions.

The Revenue Estimating Conference (the "Conference") was established
by Act No. 814 of the 1987 Regular Session of the State Legislature. The
Conference was established by the Legislature to provide an official
estimate of anticipated State revenues upon which the executive budget
shall be based, to provide for a more stable and accurate method of
financial planning and budgeting and to facilitate the adoption of a
balanced budget as is required by Article VII, Section 10(E) of the State
Constitution. Act No. 814 provides that the Governor shall cause to be
prepared an executive budget presenting a complete financial and
programmatic plan for the ensuing fiscal year based only upon the official
estimate of anticipated State revenues as determined by the Revenue
Estimating Conference. Act No. 814 further provides that at no time shall
appropriations or expenditures for any fiscal year exceed the official
estimate of anticipated State revenues for that fiscal year. An amendment
to the Louisiana Constitution was approved by the Louisiana Legislature in
1990 and enacted by the electorate which granted constitutional status to
the existence of the Revenue Estimating Conference.

State General Fund: The State General Fund is the principal operating
fund of the State and was established administratively to provide for the
distribution of funds appropriated by the Louisiana Legislature for the
ordinary expenses of the State government. Revenue is provided from the
direct deposit of federal grants and the transfer of State revenues from
the Bond Security and Redemption Fund after general obligation debt
requirements are met. The beginning accumulated State General Fund balance
for fiscal year 1996-1997 was $586 million.

On January 29, 1997 the Revenue Estimating Conference (the
"Conference") adopted its official forecast of revenues for Fiscal Year
1997-98 at $5.489 billion of state general fund monies plus $94.9 million
in Lottery Proceeds, or a total of $5.584 billion, as the basis for
legislative enactment of the operating budget during the 1997 regular
session, which commences March 31, 1997. Based upon that estimate,
forecasted revenues would be approximately $192.9 million short of the
amount needed to continue state operations in the fiscal year 1997-1998 at
a level equivalent to Fiscal Year 1996-1997. The state believes it may be
possible to close this gap by providing stand-still dollar recommendations
in a number of expenditure categories.

Transportation Trust Fund: The Transportation Trust Fund was
established pursuant to (i) Section 27 of Article VII of the State
Constitution and (ii) Act No. 16 of the First Extraordinary Session of the
Louisiana Legislature for the year 1989 (collectively the "Act") for the
purpose of funding construction and maintenance of state and federal roads
and bridges, the statewide flood-control program, ports, airports, transit
and state police traffic control projects and to fund the Parish
Transportation Fund. The Transportation Trust Fund is funded by a levy of
$0.20 per gallon on gasoline and motor fuels and on special fuels (diesel,
propane, butane and compressed natural gas) used, sold or consumed in the
state (the "Gasoline and Motor Fuels Taxes and Special Fuels Taxes"). This
levy was increased from $0.16 per gallon (the "Existing Taxes") to the
current $0.20 per gallon pursuant to Act No. 16 of the First Extraordinary
Session of the Louisiana Legislature for the year 1989, as amended. The
additional tax of $0.04 per gallon (the "Act 16 Taxes") became effective
January 1, 1990 and will expire on the earlier of January 1, 2005 or the
date on which obligations secured by the Act No. 16 taxes are no longer
outstanding. The Transportation Infrastructure Model for Economic
Development Account (the "TIME Account") was established in the
Transportation Trust Fund. Moneys in the TIME account will be expended for
certain projects identified in the Act aggregating $1.4 billion and to fund
not exceeding $160 million of additional capital transportation projects.

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The State issued $263,902,639.95 of Gasoline and Fuels Tax Revenue Bonds,
1990 Series A, dated April 15, 1990 payable from the (i) Act No. 16 Taxes,
(ii) any Act No. 16 Taxes and Existing Taxes deposited in the
Transportation Trust Fund, and (iii) any additional taxes on gasoline and
motor fuels and special fuels pledged for the payment of said Bonds. As of
December 31, 1995 the outstanding principal amount of said Bonds was
$193,323,000.00.

Ad Valorem Taxation: Only local governmental units presently levy ad
valorem taxes. Under the 1921 State Constitution a $5.75 mills ad valorem
tax was being levied by the State until January 1, 1973 at which time a
constitutional amendment to the 1921 Constitution abolished the ad valorem
tax. Under the 1974 State Constitution a State ad valorem tax of up to
$5.75 mills was provided for but is not presently being levied. The
property tax is underutilized at the parish level due to a constitutional
homestead exemption from the property tax applicable to the first $75,000
of the full market value of single family residences. Homestead exemptions
do not apply to ad valorem property taxes levied by municipalities, with
the exception of the City of New Orleans. Because local governments also
are prohibited from levying an individual income tax by the constitution,
their reliance on State government is increased under the existing tax
structure.

Litigation: In 1988 the Louisiana legislature created a
Self-Insurance Fund within the Department of Treasury. That Fund consists
of all premiums paid by State agencies under the State's Risk Management
program, the investment earnings on those premiums and commissions
retained. The Self-Insurance Fund may only be used for payment of losses
incurred by State agencies under the Self-Insurance program, together with
insurance premiums, legal expenses and administration costs. For fiscal
year 1995-1996, the sum of $119,946,754.00 was paid from the Self-Insurance
Fund to satisfy claims and judgments. It is the opinion of the Attorney
General for the State of Louisiana that only a portion of the dollar amount
of potential liability of the State resulting from litigation which is
pending against the State and is not being handled through the Office of
Risk Management ultimately will be recovered by plaintiffs. It is the
opinion of the Attorney General that the estimated future liability for
existing claims is in excess of $31 million. However, there are other
claims with future possible liabilities for which the Attorney General
cannot make a reasonable estimate.

The foregoing information constitutes only a brief summary of some of
the financial difficulties which may impact certain issuers of Bonds and
does not purport to be a complete or exhaustive description of all adverse
conditions to which the issuers of the Louisiana Trust are subject.
Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control of
the issuers of Bonds, could affect or could have an adverse impact on the
financial condition of the State and various agencies and political
subdivisions located in the State. The Sponsors are unable to predict
whether or to what extent such factors may affect the issuers of Bonds, the
market value or marketability of the Bonds or the ability of the respective
issuers of the Bonds acquired by the Louisiana Trust to pay interest on or
principal of the Bonds.

Prospective investors should study with care the Portfolio of Bonds in
the Louisiana Trust and should consult with their investment advisors as to
the merits of particular issues in that Trust's Portfolio.

MAINE

RISK FACTORS--Prospective investors should consider the financial
condition of the State of Maine and the public authorities and municipal
subdivisions issuing the obligations to be purchased with the proceeds of
the sale of units. Certain of the debt obligations to be purchased by and
held in the Maine Trust are not obligations of the State of Maine and are
not supported by its full faith and credit or taxing power. The type of
debt obligation, source of payment and security for such obligations are
detailed in the official

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statements produced by the issuers thereof in connection with the offering
of such obligations. Reference should be made to such official statements
for detailed information regarding each of the obligations and the specific
risks associated with such obligations. This summary of risk factors
relates to factors generally applicable to Maine obligations and does not
address the specific risks involved in each of the obligations acquired by
the Maine Trust.

The Maine Economy. The State's economy is based primarily on natural
resources, manufacturing related to natural resources, agriculture and
tourism. Gradually the economy has begun to diversify with growth in the
trade and services sector and in relatively new industries such as health
and business services and electronics manufacturing. Maine's economy has
become more diversified as manufacturing declines in importance. Currently,
about 16% of employment is in manufacturing, mostly non-durable, while
trade accounts for 24% of employment and services accounts for 28% of
employment. Recent employment growth has been in the service sector, and
this is expected to continue, as several of the major employers are
expanding in the State. MBNA expects to more than double employment at its
Belfast, Maine facility over the next few years and National Semiconductor,
in addition to an $830 million investment in a new wafer chip plant in
South Portland, Maine, has spun off a new company, Fairchild Semiconductor,
which plans to add some 800-850 employees of its own.

Although some of the State's industries are independent from the
regional economy, Maine's economy is, in large part, dependent upon overall
improvements in both the regional and national economy. Following the
severe economic contraction of the early 1990s, the New England Region
returned to 95% of peak employment levels by the end of 1995. At that time,
the northern tier states of Maine, New Hampshire and Vermont actually
recouped the jobs lost in the downturn. The outlook for the overall New
England economy is for continued slow recovery with the lackluster
performance of the Connecticut and Rhode Island economies clouding the
vibrancy of the Massachusetts and New Hampshire showing. According to the
State Planning Office, the fact that Maine is likely more influenced by our
closest neighbors should translate to the State receiving relatively more
benefit than harm from the varied performance of those in the region.

Since experiencing an economic slide that lasted through much of 1990
and 1991 and eliminated 6% of the employment base, Maine has been on a
fairly fragile growth path. Since that time, by most measures, the State
economy has been in a steady, if slow, recovery. While typical recoveries
are marked by a resurgence in economic activity over the 4-6 quarters
following the downturn, this recovery has been painfully slow and sporadic.
Thus, while Maine continues to demonstrate economic improvement, current
economic growth would hardly be described as robust. After 4 full years,
the jobs that had been lost earlier this decade were finally recouped. In
1995, employment was down only 0.4% from the 1989 peak. Based on
preliminary 1996 information, employment levels will approximate that peak.
Unemployment has also come down and appears to be returning to its
historical position, at or below the national average; preliminary 1996
information showed a 5.1% unemployment rate, about 94% of the national
figure and 106% of the regional average. The May 1997 unemployment rate was
4.8%, the same as the national figure. The average annual unemployment rate
forecast for the State prepared by the Maine State Planning Office is 5.2%
for 1997 and 5.1% for 1998. There is, however, continued concern over the
quality of the jobs that have replaced those that had been lost. The bulk
of all jobs created through the 1980s came from the nonmanufacturing
sector, led by medical and business services, retail trade, and
construction. Manufacturing employment continued to dwindle through the
decade with the exception of a work-force build-up at Bath Iron Works in
1988 that bolstered the industrial job figures. As with the rest of the
nation, job growth in manufacturing is expected to be minimal, but
productivity gains in this sector will continue to bring wealth to the
State. Overall employment growth will average 0.5%-1.0%, a mere fraction of
the 5%-6% growth that marked the mid-eighties. The upward push on wages
brought about by fairly tight labor market conditions will be somewhat
offset by the service sector's generally lower wage and lower benefit job
offerings keeping real income growth below the 2% mark through the next 5
years.

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The recession of the early 1990s took its toll on both manufacturing and
non-manufacturing sectors, as a cyclical downturn combined with defense
cutbacks and industry restructuring to eliminate over 34,000 jobs spread
fairly evenly over the services and goods-producing sectors. Two of the
State's largest employers are Bath Iron Works (August 1996 employment
7,800) and Portsmouth Naval Shipyard (August 1996 employment 3,550). These
employment figures reflect reductions from 1995 peaks of 8,900 and 4,086
respectively. There continues to be some exposure here to defense cuts. In
order to enhance BIW's competitive position, however, the Maine legislature
approved assistance legislation amounting to about 3 million dollars
annually. There is a possibility, however, that this assistance will be
reconsidered by the legislature in light of certain news stories reporting
that BIW's parent company, General Dynamics, may merge with the parent of
BIW's chief rival, Ingalls Shipyard in Mississippi.

Consistent with the trends experienced over the past several decades,
virtually all job growth is expected to be in the nonmanufacturing sector,
led by business and health services, retail trade and construction. In the
manufacturing sector, only the fabricated metals, food, and instrument
industries are projected to see any job gains while the other goods-
producing industries will experience stable employment or minor declines.
Given Maine's comparatively high electricity prices, the restructuring of
Maine's electric utilities to create retail access to electricity supplies
could be the single most important factor in the future vibrancy and
direction of the State's economy. Over the past year, the debate on
restructuring shifted to the Public Utilities Commission as phase II of the
Legislatively-mandated process to develop a plan unfolded. While several
State's have moved forward with deregulation and greater competition in the
generation and sale of electricity, the Maine PUC created a plan for re-
regulating Maine's two largest investor-owned utilities and submitted it to
the 118th session of the Maine Legislature. More of a blueprint than a
detailed plan, the PUC proposal calls for full retail access by the year
2000. Many of the specific steps in the process are deferred to subsequent
Commission decisions, but the Legislature will ultimately set the direction
and pace of utility restructuring in Maine. The recent decision by the
owners of the Maine Yankee Nuclear Power plant to shut the plant down is
the real wild card in the ongoing deregulation trend.

State and economic growth figures often mask important regional
differences in economic activity. For example, the unadjusted State
jobless rate in May 1997 was 4.6%. Cumberland, York, Hancock and Lincoln
counties, however, all had rates of 3% or lower while the western and
northern counties had unemployment rates in the 8% to 10% range. Thus, as
the State Planning Office observes while it appears that the south and
midcoast counties might be straining against labor shortages to grow even
faster, the remainder of the State is still in low gear.

As a result of the slow expansion of the Maine economy, the economic
indicators present a mixed bag, with some increasing and others decreasing.
Of 17 economic indicators tracked most closely by the State Planning
Office, 8 indicators showed improvement in 1996 while 8 showed a decline.
Building permits showed no change. This indicates an economy that is
growing very slowly. Indeed, most of the indicators, whether positive or
negative showed only modest deviation from this "no change" midpoint.
Conversely, of the seven national indicators looked at by the State
Planning Office, five fell into the "better" column, confirming a faster
growing national economy than Maine's. The Maine Economic Growth Index (the
"EGI") is a seasonally adjusted composite of resident employment, real
taxable consumer retail sales, production hours worked in manufacturing,
and services employment designed to measure real (inflation-adjusted)
growth in the overall economy. The EGI rebounded from an almost 2 1/2
point drop at the end of March 1997, climbing to a new high of 112.1 in
April 1997. The Maine economic outlook calls for continued slow growth,
yielding payroll employment growth for 1997 and 1998 of 0.5% and 0.8%
respectively and personal income growth in the same periods of
approximately 4.8% and 4.9% respectively. Consumer retail sales are
projected to increase only 2.6% in 1997 and 3.6% in 1998, down from the
1996 projections of 5.4%. Major dampers to Maine economic growth over the
near term are expected to include slow income growth and high family debt
loads. According to the State Planning Office, perhaps the single greatest
impediment to faster economic growth in Maine is the State's very slow
population growth.

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Between 1991 and 1996, Maine's population increased by about 8,000. Over
the previous five years, the State's population increased by about 64,000,
for a growth rate eight times as fast as in the latest five year period.
Additionally, migration and aging patterns caused a decline of 11,000
persons in the 16-24 age group between 1990 and 1995, leaving a dearth of
people in the labor force's entry-level age group. However, this situation
may be improving. According to the U.S. Bureau of the Census, Maine had a
net in-migration (2,300) in 1996, for the first time since 1990, and the
Bureau's projections call for continued modest net in-migration over the
next five years.

The seasonally adjusted unemployment rate in Maine rose to 4.8% in May
1997 from a low of 4.3% in February 1997. This still reflects a drop from
5.2% a year ago in May 1996. Maine continues to rank fairly low when
measuring per capita personal income, tallying 37th in the United States in
1996, 85.9% of the national average.

Construction contract awards fell approximately 17% comparing the
first 2 months of 1997 with the same period in 1996. Unlike a year ago,
however, the principal drag has been extremely weak non-residential
construction sector, which was down approximately 68% between the first 2
months of 1996 and the first 2 months of 1997. In contrast, the
residential sector increased 17% and the non-building sector (roads,
bridges, etc.) increased approximately 69% in comparing the same periods.
According to the Institute for Real Estate Research and Education, the
number of housing units sold in 1996 was up 5% from 1995.

In summary, through the first several months of 1997, the Maine
economy has been growing, but sporadically. Curiously, while economic
growth in Maine has been relatively slow, general fund revenues are well
above the forecast, with a $58 million surplus through May 1997. During
this time, a real economic growth for the first quarter in the US was 5.9%,
but only 1.9% in Maine. Similarly, retail store sales for the year through
April were up 5.5% nationally, but only up 3.1% (through May) in Maine.
Also payroll employment for May was up 2.1% over the previous May in the
US, but only up 1.4% in Maine. And, while national personal income rose
5.4% in 1996, the increase in Maine was only 3.7%.

Yet, while income growth in Maine has been relatively weak (and below
projections), personal income tax revenues have been very strong ($42.8
million surplus for the fiscal year through May 1997). Personal income
growth was weaker in Maine than in the nation in part because of slower
population growth, but the major factor appears to be that job growth here
has been largely in the lower wage paying industries these vis-a-vis the
US. The State Planning Office surmises that Maine income tax revenues have
likely been stronger than expected (given the slow income growth) in part
because the distribution of income gains have been weighted toward the
higher income brackets (capital gains from stock transfers, etc.) and at
higher incomes the marginal tax rates increase considerably with increasing
revenues.

The important question concerning how the restructuring of the United
States military will affect defense related industries in Maine now has at
least a preliminary answer. Loring Air Force Base ("LAFB") officially
closed its doors as a military base on September 30, 1994, although most of
the planes and personnel had been reassigned as much as a year earlier. The
base closing, coupled with the shutdown of the Backscatter radar system in
Bangor, meant the loss of a substantial amount of military and civilian
jobs in the region. Base clean-up operations have begun and are expected to
take several years to complete. In the meantime, the Loring Development
Authority has begun the task of attracting public and private business to
the facility. Recent news has been more favorable as LAFB was selected as a
Defense Finance and Accounting Service Center (the "DFAS Center") and a
JOBS Corps site. Currently one million square feet of approximately 3.2
million square feet of available space has been leased.

The DFAS Center became operational at Loring on May 3, 1995. To date,
the Center has hired 332 employees with a total employment projection
estimated at 550 when fully operational. In addition, a $6.3

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million renovation project for the JOBS Corps site was completed in the
fall of 1996. It is now operational with 269 students and 125 employees.
The Loring Development Authority has also decided to pursue locating a
National Airline Training Center at Loring.

Bath Iron Works ("BIW"), the State's largest employer, was recently
awarded a $108 million ship building contract for the construction of Aegis
Class destroyers. The U.S. Navy also awarded BIW a $7.8 million contract
for other continued work on the AEGIS destroyers. In June 1996, the Navy
awarded BIW a $348 million contract on a second AEGIS destroyer. BIW was
also recently awarded a $33 million contract to provide engineering, design
and maintenance on the Navy's Arliegh Burke destroyer fleet. In August
1995, BIW was acquired for $300 million by General Dynamics Corp. a larger
supplier of both defense and commercial products. The sale is seen as a
stabilizing force for BIW and assures that BIW will continue to concentrate
on the construction of ships for military use. Recent news stories about a
possible merger between BIW's parent company and the parent company of its
chief rival, however, do raise significant questions about the future of
BIW. In January 1996, BIW completed a study about commercial prospects and
concluded that the shipyard could not depend on commercial shipbuilding to
significantly supplement its defense work.

Another major employer, the Portsmouth Naval Shipyard in Kittery,
Maine staffed almost completely by a civilian work force, has taken drastic
steps over the past year to become more competitive and efficient, and is
considering re-focusing its mission and role in submarine repair. After
large layoffs in 1994 helped to shrink its staffing level by half from the
eight thousand workers employed in the 1980s the shipyard has now
stabilized. The U.S. Base Closure Commission announced in mid-1995 that the
Shipyard would not be on its base closing list. Thus, though trimmer today,
the shipyard is assured stability over the next few years.

There can be no assurances that the economic conditions discussed
above will not have an adverse effect upon the market value or
marketability of any of the debt obligations acquired by the Maine Trust or
the financial or other condition of any of the issuers of such obligations.

State Finances and Budget. On November 8, 1994, Maine citizens elected
an Independent candidate to be Governor of the State. In 1996, the voters
also elected a Democratic controlled Senate and House of Representatives.
The State operates under a biennial budget which is formulated by the
Governor and the State Budget Office in even-numbered years and presented
for approval to the Legislature in odd-numbered years.

On June 30, 1995, the Legislature approved and the Governor signed a
budget for the 1996-97 biennium. The budget proposes, for fiscal year 1996,
General Fund expenditures of $1,713,573,026 and Highway Fund expenditures
of $224,514,277 and, for fiscal year 1997, General Fund expenditures of
$1,785,543,156 and Highway Fund expenditures of $220,551,295. The
Legislature met in special session in November and December 1995 and
authorized General Fund Expenditures of $1,732,041,447 and Highway Fund
Expenditures of $257,727,929 for fiscal year 1996 and General Fund
Expenditures of $1,786,060,521 and Highway Fund Expenditures of
$226,708,840 for fiscal year 1997. In the Legislature's regular session
convened January 1996 and adjourned on April 4, 1996, the Legislature
amended the budget again and authorized General Fund Expenditures of
$1,733,842,806 and Highway Fund Expenditures of $260,799,573 for fiscal
year 1996 and General Fund Expenditures $1,797,414,117 and Highway Fund
Expenditures of $227,316,195 for fiscal year 1997.

Laws authorizing expenditures for fiscal years 1998 and 1999 were
enacted in the first regular session of the Legislature in 1997 and provide
for fiscal year 1998 General Fund expenditures of $1,825,047,780 and
Highway Fund expenditures of $217,416,987 and, for fiscal year 1999 General
Fund expenditures of $1,984,859,413 and Highway Fund expenditures of
$218,026,687.

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There can be no assurance that the budget acts for fiscal years 1998 and
1999 will not be amended from time to time.

Maine's financial operations have recovered from the pressures created
by the recession and a financial cushion has been restored. The State has
anticipated a small-unappropriated surplus at the June 30, 1997, end of the
biennium, as well as a rainy day fund balance of $23 million. In
actuality, revenues were stronger than expected in 1995-1996 allowing for
an increase in the rainy day fund to $38 million. With the trend
continuing into the 1996-1997 fiscal year, revenues are now estimated to
close the year some $30 million to $40 million (currently $24 million) over
estimates and the rainy day fund is expected to reach $45 million as of
June 30, 1997, equal to approximately 2.5% of revenues. Revenue collection
through March 1997 is about 2% over estimates. The bulk of the revenue at
overage is expected to go into a tax relief fund. The biennial 1998-1999
budget addressed an expected gap of some $360 million due to the repeal of
the hospital and nursing home taxes and a cap placed on income tax receipts
intended to be effective July 1, 1997. Governmental down sizing and
program cuts of some $244 million were enacted to ease the phase-out of the
hospital taxes and income tax cap was repealed.

Maine has passed legislation phasing out the hospital and nursing home
taxes by 1998-1999 (one year later than initially planned) and has repealed
the cap of $671 million on individual tax collections, which would have
become effective July 1, 1997. The absorption of this structural gap of
some $360 million is accomplished by about $244 million of program cuts and
spending reductions, as well as the stronger revenue performance. The
rainy day fund is expected to hold $45 million at the end of 1996-1997, its
historical high and equal to 2.5% of revenues. Revenues through the first 9
months of the year are currently $24 million or 2% ahead of estimates with
expectations of a $30 million-$40 million operating surplus. The excess is
expected to be applied to tax relief to increase the personal exemption.

The principal operating account for the State is the general fund;
supplementing it is the highway fund. The State is in the process of
conversion to a GAAP accounting system but operations are currently founded
on the budgetary basis. On a budgetary basis, Maine retained an
unappropriated surplus in the general fund through the recession. From a
high of $163.1 million in 1989, the balance dropped to $61 million at June
30, 1990, and reached $3.5 million at June 30, 1991. On a GAAP basis, the
general fund has been in deficit (based on undesignated balances) for
several years.

The State Controller prepares as soon as possible after the close of
each fiscal year an explanatory report of the financial condition of the
State. This report is the official financial report of the State
government. The financial statements of the State of Maine for the year
ended June 30, 1996 have been prepared by the State controller and have
been audited by the Department of Audit in accordance with generally
accepted auditing standards. The Department of Audit has qualified its
most recent audit opinion on these financial statements because of certain
departures from generally accepted accounting principles.

The financial condition of the State is, in large measure, a function
of the state's and the region's economy and no assurances can be given
regarding the future economy or financial condition of the State.

The State of Maine's outstanding general obligations are rated AA+ by
Standard & Poor's Ratings Services, Aa3 by Moody's Investors Services, Inc.
and AA by Fitch Investors Services, L.P.

As of March 31, 1997, there was outstanding approximately $444,157,945
general obligation bonds of the State. As of May 1, 1997, there were
authorized by the voters of the State for certain purposes, but unissued,
bonds in the aggregate principal amount of $96,155,316. As of May 1, 1997,
the aggregate principal amount of bonds of the State authorized by the
Constitution and implementing legislation for certain purposes, but
unissued, was $99,000,000.

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Lease-Purchase Agreements. From time to time, the State enters into lease-
purchase agreements for the purpose of acquiring capital equipment and
buildings. A lease-purchase agreement is secured solely by the equipment or
building which is the subject of such agreement. It is not a pledge of the
full faith and credit of the State. Lease payment and obligations are
subject to appropriation by the Legislature. In certain instances, the
State has issued certificates of participation in the lease payments to be
made pursuant to certain lease-purchase agreements. As of February 28,
1997, the aggregate principal amount of certificates of participation
outstanding was $27,983,635.

Litigation. The State is a party to numerous lawsuits. Such lawsuits
include actions to recover monetary damages from the State, disputes over
individual or corporate income taxes, disputes over sales or use taxes, and
actions to alter the regulations or administrative practices of the State
in such manner as to cause additional costs to the State. The Department of
the Attorney General is not aware of any pending or threatened litigation
or claim against the State, the outcome of which will, in his opinion, have
a material adverse effect on the financial condition of the State.

In 1993 the Maine Legislature amended the laws relating to the benefit
structure of the Maine State Retirement System (the "Amendments"). The
Amendments limited certain retirement benefits which would otherwise have
been available to eligible retirees. Litigation was commenced in federal
district court by affected employees in the Retirement System seeking
declaratory and injunctive relief which, if granted, would, in effect,
overturn the Amendments and oblige the State to increase its annual
payments to the Retirement System. In September 1996, the Federal District
Court for the District of Maine entered an order granting in part and
denying in part the relief sought by the affected employees. The Federal
District Court order has been appealed to the First Circuit Court of
Appeals by both the State and the affected employees. Oral argument of the
appeal was heard by the First Circuit Court of Appeals in April 1997, and a
decision on the appeal is anticipated in the next several months. The
Department of Attorney General of the State continues to believe that the
State will ultimately prevail in the claims of the Plaintiffs in this
litigation.

Certain public authorities. The portfolio may contain obligations of
certain public authorities and quasi-municipal corporations of the State of
Maine including the Maine Municipal Bond Bank, the Maine Health and Higher
Educational Facilities Authority and Regional Waste Systems, Inc., among
others. These various obligations will generally constitute revenue
obligations secured by loan repayments of the ultimate borrowers of the
proceeds or other revenue streams. The risks associated with these various
obligations should be assessed through reference to the official statements
for each of the respective obligations.

MARYLAND

RISK FACTORS--State Debt. The Public indebtedness of the State of
Maryland and its instrumentalities is divided into three general types. The
State issues general obligation bonds for capital improvements and for
various State projects to the payment of which the State ad valorem
property tax is exclusively pledged. In addition, the Maryland Department
of Transportation issues for transportation purposes its limited, special
obligation bonds payable primarily from specific, fixed-rate excise taxes
and other revenues related mainly to highway use. Certain authorities issue
obligations payable solely from specific non-tax, enterprise fund revenues
and for which the State has no liability and has given no moral obligation
assurance. The State and certain of its agencies also have entered into a
variety of lease purchase agreements to finance the acquisition of capital
assets. These lease agreements specify that payments thereunder are subject
to annual appropriation by the General Assembly.

General Obligation Bonds. General obligation bonds of the State are
authorized and issued primarily to provide funds for State-owned capital
improvements, including institutions of higher learning, and the
construction of locally owned public schools. Bonds have also been issued
for local government

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improvements, including grants and loans for water quality improvement
projects and correctional facilities, and to provide funds for repayable
loans or outright grants to private, non-profit cultural or educational
institutions.

The Maryland Constitution prohibits the contracting of State debt
unless it is authorized by a law levying an annual tax or taxes sufficient
to pay the debt service within 15 years and prohibiting the repeal of the
tax or taxes or their use for another purpose until the debt is paid. As a
uniform practice, each separate enabling act which authorizes the issuance
of general obligation bonds for a given object or purpose has specifically
levied and directed the collection of an ad valorem property tax on all
taxable property in the State. The Board of Public Works is directed by law
to fix by May 1 of each year the precise rate of such tax necessary to
produce revenue sufficient for debt service requirements of the next fiscal
year, which begins July 1. However, the taxes levied need not be collected
if or to the extent that funds sufficient for debt service requirements in
the next fiscal year have been appropriated in the annual State budget.
Accordingly, the Board, in annually fixing the rate of property tax after
the end of the regular legislative session in April, takes account of
appropriations of general funds for debt service.

In the opinion of counsel, the courts of Maryland have jurisdiction to
entertain proceedings and power to grant mandatory injunctive relief to (i)
require the Governor to include in the annual budget a sufficient
appropriation to pay all general obligation bond debt service for the
ensuing fiscal year; (ii) prohibit the General Assembly from taking action
to reduce any such appropriation below the level required for that debt
service; (iii) require the Board of Public Works to fix and collect a tax
on all property in the State subject to assessment for State tax purposes
at a rate and in an amount sufficient to make such payments to the extent
that adequate funds are not provided in the annual budget; and (iv) provide
such other relief as might be necessary to enforce the collection of such
taxes and payment of the proceeds of the tax collection to the holders of
general obligation bonds, pari passu, subject to the inherent
constitutional limitations referred to below.

It is also the opinion of counsel that, while the mandatory injunctive
remedies would be available and while the general obligation bonds of the
State are entitled to constitutional protection against the impairment of
the obligation of contracts, such constitutional protection and the
enforcement of such remedies would not be absolute. Enforcement of a claim
for payment of the principal of or interest on the bonds could be subject
to the provisions of any statutes that may be constitutionally enacted by
the United States Congress or the Maryland General Assembly extending the
time for payment or imposing other constraints upon enforcement.

There is no general debt limit imposed by the Maryland Constitution or
public general laws, but a special committee created by statute annually
submits to the Governor an estimate of the maximum amount of new general
obligation debt that prudently may be authorized. Although the committee's
responsibilities are advisory only, the Governor is required to give due
consideration to the committee's findings in preparing a preliminary
allocation of new general debt authorization for the next ensuing fiscal
year.

Department of Transportation Bonds. Consolidated Transportation Bonds
are limited obligations issued by the Maryland Department of
Transportation, the principal of which must be paid within 15 years from
the date of issue, for highway, port, transit, rail or aviation facilities
or any combination of such facilities. Debt service on Consolidated
Transportation Bonds is payable from those portions of the excise tax on
each gallon of motor vehicle fuel and the motor vehicle titling tax, all
mandatory motor vehicle registration fees, motor carrier fees, and the
corporate income tax as are credited to the Maryland Department of
Transportation, plus all departmental operating revenues and receipts.
Holders of such bonds are not entitled to look to other sources for
payment.

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The Maryland Department of Transportation also issues its bonds to provide
financing of local road construction and various other county
transportation projects and facilities. Debt service on these bonds is
payable from the subdivisions' share of highway user revenues held to their
credit in a special State fund.

The Maryland Transportation Authority operates certain highway, bridge
and tunnel toll facilities in the State. The tolls and other revenues
received from these facilities are pledged as security for revenue bonds of
the Authority issued under and secured by a trust agreement between the
authority and a corporate trustee. On November 9, 1994, the Maryland
Transportation Authority issued $162.6 million of special obligation
revenue bonds to fund projects at the Baltimore/Washington International
Airport secured by revenues from the passenger facility charges received by
the Maryland Aviation Administration and from the general account balance
of the Transportation Authority. As of June 30, 1997, $388.7 million of the
Transportation Authority's revenue bonds were outstanding.

Maryland Stadium Authority Bonds. The Maryland Stadium Authority is
responsible for financing and directing the acquisition and construction of
one or more new professional sports facilities in Maryland. Currently, the
Stadium Authority operates Oriole Park at Camden Yards which opened in
1992. In connection with the construction of that facility, the Authority
issued $155 million in notes and bonds. These notes and bonds, as well as
any future financing for a football stadium, are lease-backed revenue
obligations, the payment of which is secured by, among other things, an
assignment of revenues received under a lease of the sports facilities from
the Stadium Authority to the State.

The Stadium Authority also has been assigned responsibility for
constructing an expansion of the Convention Centers in Baltimore and Ocean
City and construction of a conference center in Montgomery County. The
Baltimore Convention Center expansion is expected to cost $163 million and
is being financed through a combination of funding from Baltimore City,
Stadium Authority revenue bonds, and State general obligation bonds. The
Ocean City Convention Center expansion is expected to cost $35 million and
is being financed through a combination of funding from Ocean City and the
Stadium Authority. The Montgomery County conference center is expected to
cost $27.5 million and is being financed through a combination of funding
from Montgomery County and the Stadium Authority.

In October 1995, the Stadium Authority and the Baltimore Ravens
(formally known as the Cleveland Browns) executed a Memorandum of Agreement
which commits the Ravens to occupy a to be constructed football stadium in
Baltimore City. The Agreement was approved by the Board of Public Works and
constitutes a "long-term lease with a National Football League team" as
required by statute for the issuance of Stadium Authority bonds. The
Stadium Authority sold $87.565 million in lease-backed revenue bonds on May
1, 1996. The proceeds from the bonds, along with cash available from State
lottery proceeds, investment earnings, and other sources will be used to
pay project design and construction expenses of approximately $200 million.
The bonds are solely secured by an assignment of revenues received under a
lease of the project from the Stadium Authority to the State.

Miscellaneous Revenue and Enterprise Financings. Certain other
instrumentalities of the State government are authorized to borrow money
under legislation which expressly provides that the loan obligations shall
not be deemed to constitute a debt or a pledge of the faith and credit of
the State. The Community Development Administration of the Department of
Housing and Community Development, higher educational institutions
(including St. Mary's College of Maryland, the University of Maryland
System, and Morgan State University), and the Maryland Environmental
Service have issued and have outstanding bonds of this type. The principal
of and interest on bonds issued by these bodies are payable solely from
various sources, principally fees generated from use of the facilities or
enterprises financed by the bonds.

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The Water Quality Revolving Loan Fund is administered by the Water Quality
Financing Administration in the Department of the Environment. The Fund may
be used to provide loans, subsidies and other forms of financial assistance
to local government units for wastewater treatment projects as contemplated
by the 1987 amendments to the federal Water Pollution Control Act. The
Administration is authorized to issue bonds secured by revenues of the
Fund, including loan repayments, federal capitalization grants, and
matching State grants.

The University of Maryland System, Morgan State University, and St.
Mary's College of Maryland are authorized to issue revenue bonds for the
purpose of financing academic and auxiliary facilities. Auxiliary
facilities are any facilities that furnish a service to students, faculty,
or staff, and that generate income. Auxiliary facilities include housing,
eating, recreational, campus, infirmary, parking, athletic, student union
or activity, research laboratory, testing, and any related facilities.

Although the State has authority to make short-term borrowings in
anticipation of taxes and other receipts up to a maximum of $100 million,
in the past it has not issued short-term tax anticipation and bond
anticipation notes or made any other similar short-term borrowings.
However, the State has issued certain obligations in the nature of bond
anticipation notes for the purpose of assisting several savings and loan
associations in qualifying for Federal insurance and in connection with the
assumption by a bank of the deposit liabilities of an insolvent savings and
loan association.

Lease and Conditional Purchase Financings. The State has financed the
construction and acquisition of various facilities through conditional
purchase, sale-leaseback, and similar transactions. All of the lease
payments under these arrangements are subject to annual appropriation by
the Maryland General Assembly. In the event that appropriations are not
made, the State may not be held contractually liable for the payments.

Ratings. The general obligation bonds of the State of Maryland have
been rated by Moody's Investors Service, Inc. as Aaa, by Standard & Poor's
Corporation as AAA, and by Fitch Investors Service, Inc. as AAA.

Local Subdivision Debt. The counties and incorporated municipalities
in Maryland issue general obligation debt for general governmental
purposes. The general obligation debt of the counties and incorporated
municipalities is generally supported by ad valorem taxes on real estate,
tangible personal property and intangible personal property subject to
taxation. The issuer typically pledges its full faith and credit and
unlimited taxing power to the prompt payment of the maturing principal and
interest on the general obligation debt and to the levy and collection of
the ad valorem taxes as and when such taxes become necessary in order to
provide sufficient funds to meet the debt service requirements. The amount
of debt which may be authorized may in some cases be limited by the
requirement that it not exceed a stated percentage of the assessable base
upon which such taxes are levied.

In the opinion of counsel, the issuer may be sued in the event that it
fails to perform its obligations under the general obligation debt to the
holders of the debt, and any judgments resulting from such suits would be
enforceable against the issuer. Nevertheless, a holder of the debt who has
obtained any such judgment may be required to seek additional relief to
compel the issuer to levy and collect such taxes as may be necessary to
provide the funds from which a judgment may be paid. Although there is no
Maryland law on this point, it is the opinion of counsel that the
appropriate courts of Maryland have jurisdiction to entertain proceedings
and power to grant additional relief, such as a mandatory injunction, if
necessary, to enforce the levy and collection of such taxes and payment of
the proceeds of the collection of the taxes to the holders of general
obligation debt, pari passu, subject to the same constitutional limitations
on enforcement, as described above, as apply to the enforcement of
judgments against the State.

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Local subdivisions, including counties and municipal corporations, are also
authorized by law to issue special and limited obligation debt for certain
purposes other than general governmental purposes. The source of payment of
that debt is limited to certain revenues of the issuer derived from
commercial activities operated by the issuer, payments made with respect to
certain facilities or loans, and any funds pledged for the benefit of the
holders of the debt. That special and limited obligation debt does not
constitute a debt of the State, the issuer or any other political
subdivision of either within the meaning of any constitutional or statutory
limitation. Neither the State nor the issuer or any other political
subdivision of either is obligated to pay the debt or the interest on the
debt except from the revenues of the issuer specifically pledged to the
payment of the debt. Neither the faith and credit nor the taxing power of
the State, the issuer or any other political subdivision of either is
pledged to the payment of the debt. The issuance of the debt is not
directly or indirectly or contingently an obligation, moral or other, of
the State, the issuer or any other political subdivision of either to levy
any tax for its payment.

Special Authority Debt. The State and local governments have created
several special authorities with the power to issue debt on behalf of the
State or local government for specific purposes, such as providing
facilities for non-profit health care and higher educational institutions,
facilities for the disposal of solid waste, funds to finance single family
and low-to-moderate income housing, and similar purposes. The Maryland
Health and Higher Educational Facilities Authority, the Northeast Maryland
Waste Disposal Authority, the Housing Opportunities Commission of
Montgomery County, and the Housing Authority of Prince George's County are
some of the special authorities which have issued and have outstanding debt
of this type.

The debts of the authorities issuing debt on behalf of the State and
the local governments are limited obligations of the authorities payable
solely from and secured by a pledge of the revenues derived from the
facilities or loans financed with the proceeds of the debt and from any
other funds and receipts pledged under an indenture with a corporate
trustee. The debt does not constitute a debt, liability or pledge of the
faith and credit of the State or of any political subdivision or of the
authorities. Neither the State nor any political subdivision thereof nor
the authorities shall be obligated to pay the debt or the interest on the
debt except from such revenues, funds and receipts. Neither the faith and
credit nor the taxing power of the State or of any political subdivision of
the State or the authorities is pledged to the payment of the principal of
or the interest on such debt. The issuance of the debt is not directly or
indirectly an obligation, moral or other, of the State or of any political
subdivision of the State or of the authority to levy or to pledge any form
of taxation whatsoever, or to make any appropriation, for their payment.
The authorities have no taxing power.

Other Risk Factors. The manufacturing sector of Maryland's economy,
which historically has been a significant element of the State's economic
health, has experienced severe financial pressures and an overall
contraction in recent years. This is due in part to the reduction in
defense-related contracts and grants, which has had an adverse impact that
is substantial and is believed to be disproportionately large compared with
the impact on most other states. The State has endeavored to promote
economic growth in other areas, such as financial services, health care and
high technology. Whether the State can successfully make the transition
from an economy reliant on heavy industries to one based on service-and
science-oriented businesses is uncertain. Moreover, future economic
difficulties in the service sector and high technology industries could
have an adverse impact on the finances of the State and its subdivisions,
and could adversely affect the market value of the Bonds in the Maryland
Trust or the ability of the respective obligors to make payments of
interest and principal due on such Bonds.

The State and its subdivisions, and their respective officers and
employees, are defendants in numerous legal proceedings, including alleged
torts and breaches of contract and other alleged violations of laws.
Adverse decisions in these matters could require extraordinary
appropriations not budgeted for, which could adversely affect the ability
to pay obligations on indebtedness.

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MASSACHUSETTS

RISK FACTORS--The Commonwealth of Massachusetts and certain of its
cities and towns have at certain times in the recent past undergone serious
financial difficulties which have adversely affected and, to some degree,
continue to adversely affect their credit standing. These financial
difficulties could adversely affect the market values and marketability of,
or result in default in payment on, outstanding bonds issued by the
Commonwealth or its public authorities or municipalities, including the
Debt Obligations deposited in the Trust. The following description
highlights some of the more significant financial problems of the
Commonwealth and the steps taken to strengthen its financial condition.
Generally, the amounts provided herein are calculated on a statutory basis
which may sometimes differ materially from that reported on a GAAP basis.

The effect of the factors discussed below upon the ability of
Massachusetts issuers to pay interest and principal on their obligations
remains unclear and in any event may depend on whether the obligation is a
general or revenue obligation bond (revenue obligation bonds being payable
from specific sources and therefore generally less affected by such
factors) and on what type of security, if any, is provided for the bond. In
order to constrain future debt service costs, the Executive Office for
Administration and Finance established in November, 1988 an annual fiscal
year limit on capital spending of $925 million, effective fiscal 1990. This
limit has been increased to $1.05 billion. In January, 1990, legislation
was enacted to impose a limit on debt service in Commonwealth budgets
beginning in fiscal 1991. The law provides that no more than 10% of the
total appropriations in any fiscal year may be expended for payment of
interest and principal on general obligation debt of the Commonwealth
(excluding the Fiscal Recovery Bonds discussed below). It should also be
noted that Chapter 62F of the Massachusetts General Laws establishes a
state tax revenue growth limit for each fiscal year equal to the average
positive rate of growth in total wages and salaries in the Commonwealth, as
reported by the federal government, during the three calendar years
immediately preceding the end of such fiscal year. The limit could affect
the Commonwealth's ability to pay principal and interest on its debt
obligations. It is possible that other measures affecting the taxing or
spending authority of Massachusetts or its political subdivisions may be
approved or enacted in the future.

The Commonwealth has waived its sovereign immunity and consented to be
sued under contractual obligations including bonds and notes issued by it.
However, the property of the Commonwealth is not subject to attachment or
levy to pay a judgment, and the satisfaction of any judgment generally
requires legislative appropriation. Enforcement of a claim for payment of
principal of or interest on bonds and notes of the Commonwealth may also be
subject to provisions of federal or Commonwealth statutes, if any,
hereafter enacted extending the time for payment or imposing other
constraints upon enforcement, insofar as the same may be constitutionally
applied. The United States Bankruptcy Code is not applicable to states.

Cities and Towns. During recent years limitations were placed on the
taxing authority of certain Massachusetts governmental entities that may
impair the ability of the issuers of some of the Debt Obligations in the
Massachusetts Trust to maintain debt service on their obligations.
Proposition 2 1/2, passed by the voters in 1980, led to large reductions in
property taxes, the major source of income for cities and towns. Between
fiscal 1981 and fiscal 1997, the aggregate property tax levy grew from
$3.346 billion to $6.160 billion, representing an increase of approximately
84.1%. By contrast, according to federal Bureau of Labor Statistics, the
Consumer price index for all urban consumers in Boston grew during the same
period by approximately 97.7%.

During the 1980's, the Commonwealth increased payments to its cities,
towns and regional school districts to mitigate the import of Proposition 2
1/2 on local programs and services. In fiscal 1998, approximately 20.6% of
the Commonwealth's budget is estimated to be allocated to direct Local Aid.
In addition to direct Local Aid, the Commonwealth has provided substantial
indirect aid to local governments, including, for example, payments for
MBTA assistance and debt service, pensions for teachers, pension cost-

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of-living allowances for municipal retirees, housing subsidies and the
costs of courts and district attorneys that formerly had been paid by the
counties.

Many communities have responded to the limitations imposed by
Proposition 2 1/2 through statutorily permitted overrides and exclusions.
Override activity steadily increased throughout the 1980's before peaking
in fiscal 1991 and decreasing thereafter. In fiscal 1997, 17 communities
had successful override referenda which added an aggregate of $5.4 million
to their levy limits. In fiscal 1997, the impact of successful override
referenda, going back as far as fiscal 1993, was to raise the levy limits
of 114 communities by $48.8 million. Although Proposition 2-1/2 will continue
to constrain local property tax revenues, significant capacity exists for
overrides in nearly all cities and towns.

In addition to overrides, Proposition 2-1/2 allows a community, through
voter approval, to assess taxes in excess of its levy limit for the payment
of certain capital projects (capital outlay expenditure exclusions) and for
the payment of specified debt service costs (debt exclusions). Capital
exclusions were passed by 20 communities in fiscal 1997 and totaled $3.2
million. In fiscal 1997, the impact of successful debt exclusion votes
going back as far as fiscal 1993, was to raise the levy limits of 236
communities by $612.9 million.

A statute adopted by voter initiative petition at the November, 1990
statewide election regulates the distribution of local aid to cities and
towns. This statute requires that, subject to annual appropriation, no less
than 40% of collections from personal income taxes, sales and use taxes,
corporate excise taxes and lottery fund proceeds be distributed to cities
and towns. Under the law, the local aid distribution to each city or town
would equal no less than 100% of the total local aid received for fiscal
1989. Distributions in excess of fiscal 1989 levels would be based on new
formulas that would replace the current local aid distribution formulas. By
its terms, the new formula would have called for a substantial increase in
direct local aid in fiscal 1992, and would call for such an increase in
fiscal 1993 and in subsequent years. However, local aid payments expressly
remain subject to annual appropriation by Legislature, and the
appropriations for Local Aid since the enactment of the initiative law have
not met the levels set forth in the initiative law.

Pension Liabilities. Comprehensive pension funding legislation
approved in January, 1988 requires the Commonwealth to fund future pension
liabilities currently and to amortize the Commonwealth's accumulated
unfunded liabilities over 40 years. The unfunded actuarial accrued
liability, as of January 1, 1996, relative to the state employees' and
teachers' systems and the State-Boston retirement system, to Boston
teachers and to the cost-of-living allowances for local systems, is
reported in the schedule to be approximately $4.774 billion, $476.6 million
and $1.470 billion, respectively, for a total unfunded actuarial liability
of $6.720 billion. As of December 31, 1996 the Commonwealth's pension
reserves had grown to approximately $7.7 billion. The fiscal 1998 budget
of the Commonwealth adopts a 20-year flat payment schedule which will fund
the unfunded employee pension liability by the year 2018, ten years earlier
than the previous schedule.

Annual payments under the funding schedule through fiscal 1998 must be
at least equal to the total estimated pay-as-you-go benefit cost in such
year. As a result of this requirement, the funding requirements for fiscal
1998 and 1999 are estimated to be increased to approximately $1.046 billion
and $1.059 billion, respectively. Acting Governor Cellucci has proposed
overriding the foregoing requirement relating to the first ten years of the
schedule in order to limit required expenditures in fiscal 1999 to
approximately $945.3 million. Total pension expenditures increased from
$868.2 million in fiscal 1993 to $1.005 billion in 1996 and $1.069 billion
in 1997. The estimated pension expenditures for fiscal 1998 are
approximately $1.046 billion.

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Pursuant to legislation enacted as part of the fiscal 1997 budget, public
employees hired on or after July 1, 1996 must contribute 9% of their
regular compensation to their retirement system except for state police
hired on or after such date who must contribute 12%.

State Budget and Revenues. The Commonwealth's Constitution requires,
in effect, that its budget be balanced each year. The Commonwealth's fiscal
year ends June 30. The General Fund is the Commonwealth's primary operating
fund; it also functions as a residuary fund to receive otherwise
unallocated revenues and to provide monies for transfers to other funds as
required. The condition of the General Fund is generally regarded as the
principal indication of whether the Commonwealth's operating revenues and
expenses are in balance; the other principal operating funds (the Local Aid
Fund and the Highway Fund) are customarily funded to at least a zero
balance.

Limitations on Commonwealth tax revenues have been established by
enacted legislation and by public approval of an initiative petition which
has become law. The two measures are inconsistent in several respects,
including the methods of calculating the limits and the exclusions from the
limits. The initiative petition does not exclude debt service on the
Commonwealth's notes and bonds from the limits. State tax revenues in
fiscal 1993 through fiscal 1997 were lower than the limits. The Executive
Office for Administration and Finance currently estimates that state tax
revenues in fiscal 1998 will not reach the limit imposed by either the
initiative petition or the legislative enactment.

On July 28, 1990, the legislature enacted Chapter 151 which provides,
among other matters, for the Commonwealth Fiscal Recovery Loan Act of 1990
and grants authorization for the Commonwealth to issue bonds in an
aggregate amount up to $1.42 billion for purposes of funding the
Commonwealth's fiscal 1990 deficit and certain prior year Medicaid
reimbursement payments. Chapter 151 also provides for the establishment of
the Commonwealth Fiscal Recovery Fund, deposits for which are derived from
a portion of the Commonwealth's personal income tax receipts, are dedicated
for this purpose and are to be deposited in trust and pledged to pay the
debt service on these bonds. The Fiscal Recovery Bonds were retired in
December, 1997.

State finance law provides for a Stabilization Fund, a Capital
Projects Fund and a Tax Reduction Fund relating to the use of fiscal year-
end surpluses. A limitation formerly equal to 0.5% of total tax revenues
(less the amount of annual debt service costs) is imposed on the amount of
any aggregate surplus in the Commonwealth's three principal budgeted
operating funds which may be carried forward as a beginning balance for the
next fiscal year and creates a reserve of such excess amounts to be used
for specific purposes. Legislation adopted in May 1997 raised the statutory
ceiling on the Stabilization Fund to 0.5% of budgeted revenues for the
preceding fiscal year (as opposed to just tax revenues) and also provided
that up to 40% of any fiscal year-end surplus may, prior to any transfer to
the Stabilization Fund, be held in a separate account to be used for
capital expenditures, if there is a negative balance in the state's capital
funds. Amounts credited to the Stabilization Fund are not generally
available to defray current year expenses without subsequent specific
legislative authorization. Amounts in excess of the limit are to be
transferred to the Tax Reduction Fund to be applied to the reduction of
personal income taxes. For each of fiscal years 1995 and 1996, the
Legislature overrode the general provisions governing deposits to or the
use of excess balances in the Stabilization Fund by the enactment of one-
time modifications.

The budgeted operating funds of the Commonwealth ended fiscal 1993
with a surplus of revenues and other sources over expenditures and other
uses of $13.1 million and aggregate ending fund balances in the budgeted
operating funds of the Commonwealth of approximately $562.5 million.
Budgeted revenues and other sources for fiscal 1993 totaled approximately
$14.710 billion, including tax revenues of $9.940 billion. Total revenues
and other sources increased by approximately 6.9% from fiscal 1992 to
fiscal 1993, while tax revenues increased by 4.7% for the same period.
Commonwealth budgeted expenditures and other

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uses in fiscal 1993 totaled approximately $14.696 billion, which is $1.280
billion or approximately 9.6% higher than fiscal 1992 expenditures and
other uses.

Fiscal year 1994 tax revenue collections were $10.607 billion, $87
million below the Department of Revenue's fiscal year 1994 tax revenue
estimate of $10.694 billion. Budgeted revenues and other sources, including
non-tax revenues, collected in fiscal 1994 totaled approximately $15.55
billion. Budgeted expenditures and other uses of funds in fiscal 1994 were
$15.523 billion.

As a result of comprehensive education reform legislation enacted in
June, 1993, a large portion of general revenue sharing funds are earmarked
for public education and are distributed through a formula designed to
provide more aid to the Commonwealth's poorer communities. The legislation
established a fiscal 1993 state spending base of approximately $1.288
billion for local education purposes and required annual increases in state
expenditures for such purposes above that base, subject to appropriation,
estimated to be approximately $175 million in fiscal 1994, approximately
$396 million in fiscal 1995, approximately $629 million in fiscal 1996 and
approximately $881 million in fiscal 1997, with additional annual increases
anticipated in later years. The fiscal 1994, 1995, 1996 and 1997 budgets
have fully funded the requirements imposed by this legislation.

Fiscal 1995 tax revenue collections were approximately $11.163
billion, approximately $12 million above the Department of Revenue's
revised fiscal year 1995 tax revenue estimate of $11.151 billion,
approximately $556 million, or 5.2%, above fiscal 1994 tax revenues of
$10.607 billion. Budgeted revenues and other sources, including non-tax
revenues, collected in fiscal 1995 were approximately $16.387 billion,
approximately $837 million, or 5.4%, above fiscal 1994 budgeted revenues of
$15.550 billion. Budgeted expenditures and other uses of funds in fiscal
1995 were approximately $16.251 billion, approximately $728 million, or
4.7%, above fiscal 1994 budgeted expenditures and uses of $15.523 billion.
The Commonwealth ended fiscal 1995 with an operating gain of $137 million
and an ending fund balance of $726 million.

The final fiscal 1995 supplemental budget modified, with respect to
the fiscal 1995 year-end surplus, the provisions of state law governing
deposits to the Stabilization Fund. For fiscal 1995, surplus funds as
defined in the law (the sum of the undesignated fund balances at year-end
in the three principal operating funds) in excess of the amount which can
be carried forward as a beginning balance for fiscal 1996 were to be
credited, first, to the Stabilization Fund, to the extent of 0.25% of total
tax revenues, second, to a newly credited Cost Relief Fund, to the extent
of 0.5% of total tax revenues, and, third to the Stabilization Fund to the
extent of any remaining amount. Amounts in the Cost Relief Fund can be
appropriated for environmental and sanitation purposes as well as for
unanticipated obligations, unavoidable deficiencies or extraordinary
expenditures of the Commonwealth. As calculated by the Comptroller, the
amount of surplus funds (as so defined) for fiscal 1995 was approximately
$94.9 million, of which $55.9 million was available to be carried forward
as a beginning balance for fiscal 1996. Of the balance, approximately $27.9
million was deposited in the Stabilization Fund, and approximately $11.1
million was deposited in the Cost Relief Fund.

Budgeted operating funds of the Commonwealth ended fiscal 1996 with a
surplus of revenues and other sources over expenditures and other uses of
$446.4 million, resulting in aggregate ending fund balances in the budgeted
operating funds of the Commonwealth of approximately $1.172 billion.
Budgeted revenues and other sources for fiscal 1996 totaled approximately
$17.328 billion, including tax revenues of approximately $12.049 billion.
Budgeted revenues and other sources increased by approximately 5.7% from
fiscal 1995 to fiscal 1996, while tax revenues increased by approximately
7.9% for the same period. Budgeted expenditures and other uses in fiscal
1996 totaled approximately $16.881 billion, an increase of approximately
$630.6 million, or 3.9% over fiscal 1995. The fiscal 1996 year-end transfer
to the Stabilization Fund amounted to approximately $177.4 million,
bringing its balance to approximately $625 million, which exceeded the
maximum then allowed under State law. Under state finance law, year-end

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surplus amounts (as defined in the law) in excess of the amount that can
remain in the Stabilization Fund are transferred to the Tax Reduction Fund,
to be applied, subject to legislative appropriation, to the reduction of
personal income taxes. The balance in the Tax Reduction Fund, as reflected
in the 1996 Comptroller's Audited Financial Report, is approximately $231.7
million. Legislation approved by the Governor on July 30, 1996 appropriated
$150 million from the Tax Reduction Fund for personal income tax reductions
in fiscal 1997, to be implemented by a temporary increase in the amount of
the personal exemption allowable for the 1996 taxable year. Legislation
adopted in May, 1997 authorized the remaining balance of approximately $85
million in the Tax Reduction Fund to be applied toward an additional
temporary personal exemption increase during the 1997 taxable year.

On October 31, 1997, the Comptroller released the Commonwealth's
statutory basis financial report for 1997. Total fiscal 1997 expenditures
were approximately $17.949 billion. Total fiscal 1997 budgeted revenues
were approximately $18.170 billion. The report indicates that fiscal 1997
tax collections totaled approximately $12.864 billion, an increase of
approximately $815 million, or 6.8%, over fiscal 1996 and approximately
$357 million higher than the most recent official estimates released by the
Secretary of Administration and Finance on May 20, 1997. The final fiscal
1997 supplemental appropriation bill established a Capital Investment Trust
Fund to be administered by the Secretary of Administration and Finance and
provided for the transfer of $229.8 million to such fund to be charged to
fiscal 1997 in order to finance certain specified expenditures for
equipment purchases, deferred maintenance and repairs, technology upgrades
and capital purchases and improvements. The spending authorization will
expire at the end of fiscal 1999, and any unexpended balances in this new
fund will be transferred at that time to the Commonwealth Stabilization
Fund. The bill also directed the transfer of $100 million to the
Stabilization Fund (in addition to the $134.3 million transfer to the
Stabilization Fund required by the general provisions of the state finance
law and a $89.5 million transfer to the Capital Projects Funds for capital
expenditures) and the transfer of $128 million to a Caseload Increase
Mitigation Fund which had been established in the fiscal 1998 budget to
fund possible unanticipated expenditures in the Commonwealth's welfare
programs.

On July 10, 1997, the Governor signed an $18.4 billion budget for the
1998 fiscal year, an increase of 2.8% over anticipated fiscal 1997
expenditures. The budget is based on a consensus tax revenue forecast of
$12.85 billion. After a review of first quarter fiscal 1998 tax receipts,
the Executive Office for Administration and Finance revised the fiscal 1998
tax forecast upward to $13.2 billion. The 1998 tax revenue estimates were
revised again on January 16, 1998, to reflect an increase of $100 million
in tax revenues. The budget incorporates tax cuts valued by the Department
of Revenue at $61 million and provides for an accelerated pension funding
schedule. (On July 29, 1997, Governor Weld resigned in an attempt to
secure his appointment as Ambassador to Mexico, and Lieutenant Governor
Cellucci became the Acting Governor of the Commonwealth through the
expiration of Governor Weld's term on January 7, 1999.) On July 30, 1997,
the Acting Governor filed legislation that would reduce the tax rate over
three calendar years. The Executive Office for Administration and Finance
estimates that, should the legislation be adopted as filed, the static
revenue impact of these changes would be a reduction in personal income tax
collections of approximately $196 million in fiscal 1998, $587 million in
fiscal 1999, $985 million in fiscal 2000, and $1.229 billion in fiscal
2001, at which time the rate reduction would be fully implemented. The
Legislature has not yet acted on the proposal. Projected total fiscal 1998
expenditures are approximately $18.848 billion.

Year-to-date tax collections through January, 1998 total approximately
$7.577 billion, approximately $395 million, or 5.5%, higher than
collections in the corresponding period in fiscal 1997 and approximately
$102 million higher than the midpoint of the benchmark range ($7.315
billion to $7.475 billion) contemplated by the Department of Revenue's
January 16, 1998 estimates.

As of June 30, 1997, the Commonwealth had a cash position of
approximately $902 million, not including the Stabilization Fund of $799
million. The most recent quarterly cash flow projections for fiscal

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1998 were released by the State Treasurer and Secretary of Administration
and Finance on December 11, 1997 and estimate the fiscal 1998 year-end cash
position will be approximately $335.1 million. The projected year-end
balance does not include any fiscal 1998 activity that may occur after June
30, 1998 nor the balance in the Stabilization Fund ($799.3 million at June
30, 1997) or interest earnings thereon expected during fiscal 1998; it does
include $234 million to be transferred to the Stabilization Fund during
fiscal 1998 on account of fiscal 1997. The cash flow statement forecasts,
in connection with the Central Artery/Ted Williams Tunnel Project, that the
Commonwealth will issue $350 million of notes in anticipation of future
federal highway grants, noting that funding for such purposes has been
extended on an interim basis through March 31, 1998, and that successor
federal funding legislation is expected to be enacted during 1998. What the
level of future highway aid will be for the Commonwealth remains uncertain.

On January 27, 1998, Acting Governor Paul Celucci submitted a $19.06
billion budget for fiscal 1999, or total spending of $19.49 billion after
adjusting for shifts to and from off-budget accounts. The proposed fiscal
1999 spending level represents a $641.7 million, or 3.4%, increase over
projected total fiscal 1998 expenditures of $18.848 billion. Budgeted
revenues for fiscal 1999 are projected to be $18.961 billion, or $19.291
billion after adjusting for shifts to and from off-budget accounts. The
Acting Governor's proposal projects a fiscal 1999 ending balance in the
budgeted funds of $906.3 billion, including a Stabilization Fund Balance of
$878.1 million. The Acting Governor's budget recommendation is based on a
tax revenue estimate of $13.665 billion, a $510.7 million, or 3.9%,
increase over fiscal 1998 projected tax revenues of $13.154 billion. The
budget submission proposes reduction of the state income and unearned tax
rates as well as the elimination of the state capital gains tax on the sale
of homes.

During fiscal years 1993, 1994, 1995, 1996 and 1997, Medicaid
expenditures were $3.151 billion, $3.313 billion, $3.398 billion, $3.416
billion and $3.456 billion, respectively. The average annual growth rate
from fiscal 1993 to fiscal 1997 was 1.9%. The moderate rate of growth is
due to a number of savings and cost control initiatives that the Division
of Medical Assistance continues to implement and refine, including managed
care, utilization review and the identification of third party liabilities.
Fiscal 1998 spending for the current Medicaid program is projected to total
$3.616 billion, an increase of 4.6% from fiscal 1997.

The liabilities of the Commonwealth with respect to outstanding bonds
and notes payable as of January 1, 1998 totaled $14.469 billion. These
liabilities consisted of $9.595 billion of general obligation debt, $629
million of special obligation debt, $3.954 billion of supported debt, and
$291 million of guaranteed debt.

Capital spending by the Commonwealth rose from approximately $600
million in fiscal 1987 to $971 million in fiscal 1989. In November 1988,
the Executive Office for Administration and Finance established an
administrative limit on state financed capital spending in the Capital
Projects Funds of $925 million per fiscal year. Capital expenditures were
$575.9 million, $760.6 million, $902.2 million, $908.5 million and $956.3
million in fiscal 1993, 1994, 1995, 1996 and 1997, respectively. The growth
in capital spending in the 1980's accounts for a significant rise in debt
service expenditures since fiscal 1989. Debt service expenditures were
$1.140 billion, $1.149 billion, $1.231 billion, $1.183 billion and $1.276
billion for fiscal 1993, fiscal 1994, fiscal 1995, fiscal 1996 and fiscal
1997, respectively, and are projected to be $1.224 billion for fiscal 1998.
These amounts represent debt service payments on direct Commonwealth debt
and do not include debt service on notes issued to finance the fiscal 1989
deficit and certain Medicaid-related liabilities, which were paid in full
from non-budgeted funds. Also excluded are debt service contract assistance
to certain state agencies and the municipal school building assistance
program. In addition to debt service on bonds issued for capital purposes,
the Commonwealth was obligated to pay the principal of and interest on the
Fiscal Recovery Bonds described above, which were retired in December,
1997.

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In January, 1990 legislation was enacted to impose a limit on debt service
in Commonwealth budgets beginning in fiscal 1991. The law provides that no
more than 10% of the total appropriations in any fiscal year may be
expended for payment of interest and principal on general obligation debt
(excluding the Fiscal Recovery Bonds) of the Commonwealth. This law may be
amended or appealed by the legislature or may be superseded in the General
Appropriation Act for any year. From fiscal year 1991 through fiscal year
1997, this percentage has been below the limits established by this law.
The estimated debt service for fiscal 1998 is estimated to fall below the
limit as well.

Legislation enacted in December, 1989 imposes a limit on the amount of
outstanding direct bonds of the Commonwealth. The limit for fiscal 1998 is
$9.568 billion; as of July 1, 1997 there were $8.697 billion of outstanding
direct bonds. The law provides that the limit for each subsequent fiscal
year shall be 105% of the previous fiscal year's limit. The Fiscal Recovery
Bonds were not included in computing the amount of bonds subject to this
limit. Since this law's inception, the limit has never been reached.

In August, 1991, the Governor announced a five-year capital spending
plan. The policy objective of the Five-Year Capital Spending Plan is to
limit the debt burden of the Commonwealth by controlling the relationship
between current capital spending and the issuance of bonds by the
Commonwealth. In fiscal 1992, the annual limit was set at approximately
$825 million. During fiscal 1995, the limit was raised to approximately
$900 million and during fiscal 1998 to approximately $1.0 billion. For
fiscal 1998 through 2002, the plan forecasts total capital spending to be
financed by Commonwealth debt of approximately $5.05 billion, which is
significantly below legislatively authorized capital spending levels. The
current plan assumes that the projected level of capital spending will
leverage additional federal transportation aid of approximately $4.164
billion for this period and also projects the issuance of $1.5 billion in
grant anticipation notes in anticipation of future federal aid to be
received during fiscal years 2003 to 2007 and beyond. The latter assumption
will require a legislative increase in the authorization for grant
anticipation notes. Up to $900 million of such notes are payable from
Commonwealth bonds if federal grants are not available. Federal aid is
uncertain beyond March 31, 1998, when the Intermodal Surface Transportation
Efficiency Act of 1991 expires. The reauthorization of federal aid being
considered by Congress is expected to run through the year 2002 or 2003,
although it may be extended for shorter interim periods. Federal funds for
the complete repayment of the grant anticipation notes contemplated by the
five-year plan would have to be authorized by subsequently enacted
successor legislation. The five-year plan also assumes that the projected
level of payments from third-party agencies, such as the Massachusetts
Turnpike Authority and the Massachusetts Port Authority, and from other
sources will be $1.355 billion, such payments, however, being subject to
certain conditions. In addition, a disputed initiative petition has been
filed, which, if successful, could be expected to have a materially adverse
effect on the ability of certain of such agencies to make such payments.
The five-year plan further assumes the receipt by the Commonwealth of
annual federal highway apportionments of $550 million and that by the
completion of the Central Artery/Ted Williams Tunnel project of 2005, the
project will have required expenditures totaling $11.6 billion, and that
insurance reimbursements and proceeds from real estate disposition related
to the project will be received after project completion. What the level of
future federal highway aid will be for the Commonwealth remains uncertain.

Unemployment. The Massachusetts unemployment rate averaged 6.9%, 6.0%,
5.4%, 4.5% and 4.0% in calendar years 1993, 1994, 1995, 1996 and 1997,
respectively. The Massachusetts unemployment rate in December, 1997 was
3.8% as compared to 3.9% in November, 1997 and 4.1% in December, 1996. The
Massachusetts unemployment rates from and after 1994 are not comparable to
prior rates due to a new procedure for computation which became effective
in 1994.

The assets and liabilities of the Commonwealth Unemployment
Compensation Trust Fund are not assets and liabilities of the Commonwealth.
As of December 31, 1997 the private contributory sector of the
Massachusetts Unemployment Trust Fund had a surplus of $1.356 billion. The
Division of Employment and

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Training's January 1998 quarterly report indicates that the contributions
provided by current law should result in a private contributory account
balance of $1.649 billion in the Unemployment Compensation Trust Fund by
December, 1998 and rebuild reserves in the system to $2.318 billion by the
end of 2002.

Litigation. The Attorney General of the Commonwealth is not aware of
any cases involving the Commonwealth which in his opinion would affect
materially its financial condition. However, certain cases exist containing
substantial claims, among which are the following.

Former residents of a state facility have commenced an action against
the Commonwealth alleging that in the 1950's they were fed radioactive
isotopes without their informed consent. The amount of potential liability
is estimated to be $25 million.

The United States has brought an action on behalf of the U.S.
Environmental Protection Agency alleging violations of the Clean Water Act
and seeking to enforce the clean-up of Boston Harbor. The Massachusetts
Water Resources Authority (the "MWRA") has assumed primary responsibility
for developing and implementing a court approved plan and time table for
the construction of the treatment facilities necessary to achieve
compliance with the federal requirements. The MWRA currently projects the
total cost of construction of the wastewater facilities required under the
court's order not including costs pursuant to the draft combined sewer
outflow plan ("CSO"), will be approximately $3.142 billion in current
dollars, with approximately $601 million to be spent after June 30, 1997.
With CSO costs, the MWRA anticipates spending approximately $901 million
after that date. Under the Clean Water Act, the Commonwealth may be liable
for any costs of complying with any judgment in this case to the extent
that the MWRA or a municipality is prevented by state law from raising
revenues necessary to comply with such a judgment.

On February 12, 1998, the U.S. Department of Justice filed a complaint
seeking to compel the MWRA to construct a water filtration plant for water
drawn from the Wachusett Reservoir and, together with the Metropolitan
District Commission, to take certain watershed protection measures.
Attorneys for all parties are negotiating and it is too early to determine
the outcome of those negotiations.

A suit was brought by associations of bottlers challenging the 1990
amendments to the bottle bill which escheat abandoned deposits to the
Commonwealth. In March of 1993, the Supreme Judicial Court upheld the
amendments except for the initial funding requirement, which the Court held
severable. The Superior Court has ruled that the Commonwealth is liable for
a certain amount, including interest, as a result of the Supreme Judicial
Court's decision, such amount to be determined in further proceedings. The
Commonwealth in February 1996 settled with one group of plaintiffs with
settlement payments totaling $7 million. Litigation with the other group of
plaintiffs is still pending. The remaining potential liability is
approximately $50 million.

In a suit filed against the Department of Public Welfare, plaintiffs
allege that the Department has unlawfully denied personal care attendant
services to severely disabled Medicaid recipients. The Court has denied
plaintiffs' motion for a preliminary injunction and class certification. If
plaintiffs were to prevail on their claims, the suit could cost the
Commonwealth as much as $200 million per year. In September 1995, the
parties argued cross motions for summary judgment, which are now under
advisement.

There are several large eminent domain cases pending against the
Commonwealth with potential liability aggregating $180 million.

The constitutionality of the former version of the Commonwealth's bank
excise tax has been challenged by a Massachusetts bank. In 1992, several
pre-1992 petitions, which raised the same issues, were settled prior to a
board decision. The petitioner has now filed claims with respect to 1993
and 1994 claiming

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the tax violated the Commerce Clause of the United States Constitution by
including the bank's worldwide income without apportionment. Another
Massachusetts bank has raised the same claims as outlined above. The
Commonwealth's potential aggregate liability is $286 million.

In March 1995, the Supreme Judicial Court held that certain deductions
from the net worth measure of the Massachusetts corporate excise tax
violate the Commerce Clause of the United States Constitution. In October
1995, the United States Supreme Court denied the Commonwealth's petition
for a writ of certiorari. A partial final judgment for tax years ending
prior to January 1, 1995 was subsequently entered by the Supreme Judicial
Court. The Department of Revenue estimates that tax revenues in the amount
of $40 million to $55 million may be abated as a result of this decision.
On May 13, 1996, the Supreme Judicial Court entered an order for judgment
for tax years ending on or after January 1, 1996. A final judgment was
entered on June 6, 1996. The Department of Revenue is estimating the fiscal
impact of that ruling; to date it has paid approximately $15 million in
abatements in accordance with the judgement.

The Commonwealth has commenced an action and has been named a
defendant in another action brought as a result of indoor air quality
problems in a building previously leased by the Commonwealth. Potential
liability to the Commonwealth in each case is approximately $25 million.

A putative class action has been brought against the Commonwealth
seeking to invalidate the savings bank life insurance statute. Potential
liability to the Commonwealth is $71 million. On October 16, 1997, the
court dismissed the case on statute-of-limitations grounds. The plaintiff
has filed a notice of appeal.

There are also several other tax matters in litigation which may
result in an aggregate liability in excess of $75 million.

Ratings. The ratings by the three bond rating agencies, Standard &
Poor's, Moody's Investors Service, Inc. and Fitch IBCA, Inc., on
Massachusetts general obligation debt reached lows in 1989-1990 of BBB, Baa
and A, respectively, where they remained until 1992-1993 when they were all
increased. Currently, the Commonwealth's general obligation debt is rated
at AA-, A1 and AA- by Standard & Poor's, Moody's and Fitch IBCA,
respectively.

Ratings may be changed at any time and no assurance can be given that
they will not be revised or withdrawn by the rating agencies, if in their
respective judgments, circumstances should warrant such action. Any
downward revision or withdrawal of a rating could have an adverse effect on
market prices of the bonds.

MICHIGAN

RISK FACTORS--Due primarily to the fact that the leading sector of the
State's economy is the manufacturing of durable goods, economic activity in
the State has tended to be more cyclical than in the nation as a whole.
While the State's efforts to diversify its economy have proven successful,
as reflected by the fact that the share of employment in the State in the
durable goods sector has fallen from 33.1 percent in 1960 to 17.1 percent
in 1995, durable goods manufacturing still represents a sizable portion of
the State's economy. As a result, any substantial national economic
downturn is likely to have an adverse effect on the economy of the State
and on the revenues of the State and some of its local governmental units.
Historically, the average monthly unemployment rate in the State has been
higher than the average figures for the United States. More recently, the
State's unemployment rate has remained below the national average. During
1996, the average monthly unemployment rate in this State was 4.9% as
compared to a national average of 5.4% in the United States.

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The State's economy could be affected by changes in the auto industry,
notably consolidation and plant closings resulting from competitive
pressures and over-capacity. The financial impact on the local units of
government in the areas in which plants are or have been closed could be
more severe than on the State as a whole. State appropriations and State
economic conditions in varying degrees affect the cash flow and budgets of
local units and agencies of the State, including school districts and
municipalities, as well as the State of Michigan itself.

The Michigan Constitution limits the amount of total revenues of the
State raised from taxes and certain other sources to a level for each
fiscal year equal to a percentage of the State's personal income for the
prior calendar year. In the event the State's total revenues exceed the
limit by 1% or more, the Constitution requires that the excess be refunded
to taxpayers. To avoid exceeding the revenue limit in the State's 1994-95
fiscal year the State refunded approximately $113 million through income
tax credits for the 1995 calendar year. The State Constitution does not
prohibit the increasing of taxes so long as revenues are expected to amount
to less than the revenue limit and authorizes exceeding the limit for
emergencies when deemed necessary by the governor and a two-thirds vote of
the members of each house of the legislature. The State Constitution
further provides that the proportion of State spending paid to all local
units to total spending may not be reduced below the proportion in effect
in the 1978-79 fiscal year. The Constitution requires that if the spending
does not meet the required level in a given year an additional
appropriation for local units is required for the following fiscal year.
The State Constitution also requires the State to finance any new or
expanded activity of local units mandated by State law. Any expenditures
required by this provision would be counted as State spending for local
units for purposes of determining compliance with the provisions cited
above.

The State Constitution limits State general obligation debt to (i)
short-term debt for State operating purposes; (ii) short-and long-term debt
for purposes of making loans to school districts; and (iii) long-term debt
for a voter-approved purpose. Short-term debt for operating purposes is
limited to an amount not in excess of fifteen (15%) percent of undedicated
revenues received by the State during the preceding fiscal year and must
mature in the same fiscal year in which it is issued. Debt incurred by the
State for purposes of making loans to school districts is recommended by
the Superintendent of Public Instruction who certifies the amounts
necessary for loans to school districts for the ensuing two (2) calendar
years. These bonds may be issued without vote of the electors of the State
and in whatever amount required. There is no limit on the amount of
long-term voter-approved State general obligation debt. In addition to the
foregoing, the State authorizes special purpose agencies and authorities to
issue revenue bonds payable from designated revenues and fees. Revenue
bonds are not obligations of the State and in the event of shortfalls in
self-supporting revenues, the State has no legal obligation to appropriate
money to meet debt service payments. The Michigan State Housing Development
Authority has a capital reserve fund pledged for the payment of debt
service on its bonds derived from State appropriation. The act creating
this Authority provides that the Governor's proposed budget include an
amount sufficient to replenish any deficiency in the capital reserve fund.
The legislature, however, is not obligated to appropriate such moneys and
any such appropriation would require a two-thirds vote of the members of
the legislature. Obligations of all other authorities and agencies of the
State are payable solely from designated revenues or fees and no right to
certify to the legislature exists with respect to those authorities or
agencies.

The State finances its operations through the State's General Fund and
special revenue funds. The General Fund receives revenues of the State that
are not specifically required to be included in the Special Revenue Fund.
General Fund revenues are obtained approximately 55% from the payment of
State taxes and 45% from federal and non-tax revenue sources. The majority
of the revenues from State taxes are from the State's personal income tax,
single business tax, use tax, sales tax and various other taxes.
Approximately 60% of total General Fund expenditures have been for State
support of public education and for social services programs. Other
significant expenditures from the General Fund provide funds for law
enforcement,

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general State government, debt service and capital outlay. The State
Constitution requires that any prior year's surplus or deficit in any fund
must be included in the next succeeding year's budget for that fund.

In recent years, the State of Michigan has reported its financial
results in accordance with generally accepted accounting principles. For
each of the last five fiscal years the State ended the fiscal year with its
General Fund in balance after transfers from the General Fund to the Budget
Stabilization Fund. Those and certain other transfers into and out of the
Fund raised the balance in the Budget Stabilization Fund to $1.15 billion
as of September 30, 1996. In all but one of the last five fiscal years the
State has borrowed between $500 million and $900 million for cash flow
purposes. It borrowed $900 million in each of the 1996 and 1997 fiscal
years.

In January 1998, Standard & Poor's raised its rating on the State's
general obligation bonds to AA+. In July 1995, Moody's raised the State's
general obligation credit rating to Aa. Fitch Investor's Service has issued
a rating of Aa on the State's general obligation bonds.

Amendments to the Michigan Constitution which place limitations on
increases in State taxes and local ad valorem taxes (including taxes used
to meet debt service commitments on obligations of taxing units) were
approved by the voters of the State of Michigan in November 1978 and became
effective on December 23, 1978. To the extent that obligations in the
Portfolio are tax-supported and are for local units and have not been voted
by the taxing unit's electors and have been issued on or subsequent to
December 23, 1978, the ability of the local units to levy debt service
taxes might be affected.

State law provides for distributions of certain State collected taxes
or portions thereof to local units based in part on population as shown by
census figures and authorizes levy of certain local taxes by local units
having a certain level of population as determined by census figures.
Reductions in population in local units resulting from periodic census
could result in a reduction in the amount of State collected taxes returned
to those local units and in reductions in levels of local tax collections
for such local units unless the impact of the census is changed by State
law. No assurance can be given that any such State law will be enacted. In
the 1991 fiscal year, the State deferred certain scheduled payments to
municipalities, school districts, universities and community colleges.
While such deferrals were made up at later dates, similar future deferrals
could have an adverse impact on the cash position of some local units.
Additionally, while total State revenue sharing payments have increased in
each of the last five years, the State reduced revenue sharing payments to
municipalities below that level otherwise provided under formulas in each
of those fiscal years.

On March 15, 1994, the electors of the State voted to amend the
State's Constitution to increase the State sales tax rate from 4% to 6% and
to place an annual cap on property assessment increases for all property
taxes. Companion legislation also cut the State's income tax rate from 4.6%
to 4.4%, reduced some property taxes for school operating purposes and
shifted the balance of school funding sources among property taxes and
state revenues, some of which are being provided from new or increased
State taxes. The legislation also contains other provisions that may reduce
or alter the revenues of local units of government and tax increment bonds
could be particularly affected. While the ultimate impact of the
constitutional amendment and related legislation cannot yet be accurately
predicted, investors should be alert to the potential effect of such
measures upon the operations and revenues of Michigan local units of
government.

In addition, the State Legislature recently adopted a package of state
tax cuts including a phase-out of the intangibles tax, an increase in
exemption amount for the personal income tax and reductions in the single
business tax.

The State is a party to various legal proceedings seeking damages or
injunctive or other relief. In addition to routine litigation, certain of
these proceedings could, if unfavorably resolved from the point of

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view of the State, substantially affect State or local programs or
finances. These lawsuits involve programs generally in the area of
corrections, highway maintenance, social services, tax collection, commerce
and budgetary reductions to governmental units and court funding.

In November of 1997, the State Legislature adopted legislation to
provide for the funding of claims of local schools districts, some of whom
had alleged in a lawsuit, Durant v State of Michigan, that the State had,
over a period of years, paid less in school aid than required by the
State's Constitution. Under this legislation, the State will be required
to pay to school districts which were plaintiffs in the suit not more than
$212 million from the Budget Stabilization Fund on April 15, 1998, and to
other school districts from the Budget Stabilization Fund (i) an additional
$32 million per year in the fiscal years 1998-99 through 2007-08, and (ii)
up to an additional $40 million per year in the fiscal years 1998-99
through 2012-13.

The foregoing financial conditions and constitutional provisions could
adversely affect the State's or local unit's ability to continue existing
services or facilities or finance new services or facilities, and, as a
result, could adversely affect the market value or marketability of the
Michigan obligations in the Portfolio and indirectly affect the ability of
local units to pay debt service on their obligations, particularly in view
of the dependency of local units upon State aid and reimbursement programs.

The Portfolio may contain obligations of the Michigan State Building
Authority. These obligations are payable from rentals to be paid by the
State as part of the State's general operating budget. The foregoing
financial conditions and constitutional provisions could affect the ability
of the State to pay rentals to the Authority and thus adversely affect
payment of the State Building Authority Bonds.

The Portfolio may contain obligations issued by various school
districts pledging the full faith and credit of the school district. The
ability of the school district to pay debt service may be adversely
affected by those factors described above for general obligation bonds and,
if the obligations were not voted by that schools' district's electors, by
the restructuring of school operating funding as described above. The
school district obligations also may be qualified for participation in the
Michigan School Bond Loan Fund. If the bonds are so qualified, then in the
event the school district is for any reason unable to pay its debt service
commitments when due, the school district is required to borrow the
deficiency from the School Bond Loan Fund and the State is required to make
the loan. The School Bond Loan Fund is funded by means of debt obligations
issued by the State. In the event of fiscal and cash flow difficulties of
the State the availability of sufficient cash or the ability of the State
to sell debt obligations to fund the School Bond Loan Fund may be adversely
affected and this could adversely affect the ability of the State to make
loans it is required to make to school districts issuing qualified school
bonds in the event the school district's tax levies are insufficient
therefor.

MINNESOTA

RISK FACTORS--The State of Minnesota and other governmental units and
agencies, school systems and entities dependent on government
appropriations or economic activity in Minnesota have, in the past,
suffered cash deficiencies and budgetary difficulties due to changing
economic conditions. Unfavorable economic trends, such as a decline in
economic activity or recession, and other factors described below could
adversely affect the Debt Obligations and the value of the Portfolio.

Recessions in the national economy and other factors have had an
adverse impact on the economy of Minnesota and State budgetary balances. As
a consequence, during the budgetary bienniums ended in 1981, 1983, 1987,
1991 and 1993, the State found it necessary to revise revenue forecasts
downward and the State legislature was required to take remedial action to
bring the State's budget into balance on a number of occasions. The State
is constitutionally required to maintain a balanced budget.

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In the 1995-1997 biennium, as a consequence of strong economic growth,
additional revenues were realized and expenditures in addition to the
original budget for the biennium were authorized by the legislature.

In its regular and first special session in May and June 1997, the
legislature adopted a budget for the 1997-1999 biennium which provided for
revenues of $20.3 billion, expenditures of $20.9 billion and maintenance of
a cash flow reserve account at $350 million, a budget reserve account at
$522 million, a new property tax reserve account at $46 million and an
appropriations carried forward account at $72 million, and projected a
budgetary surplus of $32 million at the end of the biennium. The most
significant revenue measure enacted by the legislature was a $500 million
property tax rebate in the form of an income tax credit for taxes filed in
1998. Total budgeted expenditures increased 11.5% over the previous
biennium, with significant increases in education finance, health and human
services and anticipated property tax reform.

In November 1997, the Minnesota Department of Finance forecast a $1.3
billion budgetary surplus for the end of the biennium on June 30, 1999.
Pursuant to previously enacted allocations, $81 million of the surplus is
dedicated to education tax credits or deductions, $826 million is credited
to the property tax reform reserve and $421 million is available for
general fund use. A variety of tax reduction, rebate and expenditure
proposals to deal with the projected surplus have been placed before the
legislature, which commenced its interim session in January 1998. In
addition, the Governor has proposed a $1.0 billion capital budget for
higher education, economic development, environmental uses and other
purposes, which would be financed by $821 million in general obligation
bonds and general fund and trunk highway fund sources. As of January 1,
1998, the total State general obligation bonds outstanding was
approximately $2.2 billion and the total authorized but unissued was
approximately $660 million.

The January 1998 Department of Finance economic update indicated that
tax receipts continued at a rate higher than forecast through the end of
1997 but cautioned that general economic predictions for 1998 were more
restrained than in 1997, principally as a consequence of the economic and
financial difficulties occurring in Asia.

Any economic and budgetary difficulties could require the State, its
agencies, local units of government, schools and other instrumentalities
which depend for operating funds and debt service on State revenues or
appropriations or on other sources of revenue which may be affected by
economic conditions to expand revenue sources or curtail services or
operations in order to meet payments on their obligations. Recent forecasts
by the Minnesota Department of Finance have been based on an assumption of
continuing economic growth and its favorable impact on State revenues and
expenditures. Concerns have also been raised regarding the cost of debt
service and the capacity of the State to authorize additional major
bonding. The Sponsors are unable to predict whether or to what extent
adverse economic conditions may affect the State, other units of
government, State agencies, school districts and other affected entities
and the impact thereof on the ability of issuers of Debt Obligations in the
Portfolio to meet payment obligations. To the extent any difficulties in
making payment are perceived, the market value and marketability of Debt
Obligations in the Portfolio, the asset value of the Minnesota Trust and
interest income to the Minnesota Trust could be adversely affected.

In action related to the budgetary and funding difficulties
experienced by the State during the 1980-1983 recession, Standard & Poor's
reduced its rating on the State's outstanding general obligation bonds from
AAA to AA+ in August 1981 and to AA in March 1982. Moody's lowered its
rating on the State's outstanding general obligation bonds from Aaa to Aa
in April 1982. In January 1985, Standard & Poor's announced an upgrading in
its rating for the State's outstanding general obligation bonds from AA to
AA+. In July 1993, Fitch's raised its rating for the State's bonds from AA+
to AAA. In March 1994, Moody's announced an upgrading in its rating from Aa
to Aa1 and in May 1996 raised its rating again to

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Aaa. In July 1997, Standard & Poor's announced an upgrading in its rating
to AAA. These improved ratings were applied to the State's issuance of
$226 million in general obligation bonds in August 1997.

Certain issuers of obligations in the State, such as counties, cities
and school districts, rely in part on distribution, aid and reimbursement
programs allocated from State revenues and other governmental sources for
the funds with which to provide services and pay those obligations.
Accordingly, legislative decisions and appropriations have a major impact
on the ability of such governmental units to make payments on any
obligations issued by them. In addition, the State and certain State
agencies, such as the Minnesota Housing Finance Agency, University of
Minnesota, Minnesota Higher Education Services Office, Minnesota State
Colleges and University Board, Minnesota Higher Education Facilities
Authority, Minnesota State Armory Building Commission, Minnesota State
Zoological Board, Minnesota Rural Finance Authority, Minnesota Public
Facilities Authority, Minnesota Agricultural and Economic Development Board
and Iron Range Resources and Rehabilitation Board, also issue bonds which
are not general obligation debts of the State. The payment of these
obligations is generally subject to revenues generated from prescribed
sources or by the agencies themselves, the projects funded or discretionary
appropriations of the legislature. The particular source of payment and
security is detailed in the instruments themselves and related offering
materials. In one instance, after default by the Minnesota State Zoological
Society in installment payments supporting tax-exempt certificates of
participation issued to construct a monorail system, the legislature
refused to appropriate funds to supply the deficiency. A decision of the
Minnesota Supreme Court sustained the legislature's position that no State
obligation had been created.

A final decision in a case which held the Minnesota excise tax on
banks to be unconstitutional resulted in an initially estimated judgment,
including interest to the date of judgment in 1994, of $327 million. In
1995 the legislature authorized the Commissioner of Finance to issue up to
$400 million in State revenue bonds to pay the judgment and related
obligations. The State sold $200 million of the bonds in May 1996. The debt
service on the bonds is secured by and payable from a portion of State
lottery proceeds, federal and third party reimbursements for medical
expenses and non-dedicated departmental receipts, all of which have
previously been credited to the State general fund. Receipts from these
sources are to be held in a special reserve fund with the expected excess
over debt service requirements being transferred to the general fund. The
bonds issued for this purpose are not general obligations of the State and
the revenue sources supporting the bonds are subject to risks of adverse
legislative, executive or judicial action and economic conditions. The
Commissioner of Revenue has reduced the estimated total liability to the
plaintiffs to approximately $216 million. Most of the bond proceeds have
been expended to cover the judgment and the legislature has appropriated
$16.6 million to pay amounts in excess of the bond proceeds. However, new
claims have been filed against the State by plaintiffs not part of the
original litigation, which claims could aggregate $40 million. The State
has contested these claims as barred by the statute of limitations.

The State is also a party to other litigation in which a contrary
decision could adversely affect the State's tax revenues or fund balances,
the most significant of which are as follows. First, the St. Paul School
District and several individual plaintiffs have commenced a suit claiming
that the State has failed to provide sufficient resources to the district
to enable it to provide an adequate education to the district's poor and
minority students and students in need of special education and English
instruction. The complaint seeks declaratory relief and an order that the
State provide the district with the resources it needs. The potential
costs to the State have not been quantified. The State's motion to dismiss
the district's complaint for failure to state a claim upon which relief can
be granted was denied by the trial court and the State Court of Appeals
denied the State's request for discretionary review of that decision. The
State has filed a petition for discretionary review by the State Supreme
Court and has also brought a motion in the trial court to dismiss the
individual plaintiffs' complaints and for judgment on the pleadings as to
the district's complaint. Second, the Minnesota Branch of the NAACP and
several Minneapolis school children and their parents have brought suit
against the State claiming that the segregation of minority and poor
students in the Minneapolis public schools has deprived the students of an
adequate education equal to that received by students in

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suburban schools. The suit is a class action seeking a mandatory
injunction and attorneys' fees. Injunctive relief could force the State to
provide substantial additional funding for the Minneapolis schools, and if
the State were required to pay the cost of alleviating the causes or
effects of segregated housing, substantial additional expenditures could be
required. The district court denied the State's motion to dismiss the case
and denied the plaintiffs' motion for partial summary judgment. The
district court has issued an order certifying certain legal questions for
appeal by the Minnesota Supreme Court. Third, twelve corporations have
filed a claim in the Minnesota Tax Court claiming unconstitutional
treatment under certain provisions of the Minnesota tax law. The most
significant issue involves a provision which provides a special research
and development credit only to domiciliary corporations. The Department of
Revenue has not determined the potential refund liability were the
plaintiffs and all similarly-situated taxpayers to prevail. Fourth, the
State has been sued by plaintiffs seeking certain special education
services in private, parochial schools. Unspecified damages, costs and
attorneys' fees are claimed and any relief granted could result in
additional expenditures for education programs. Adverse decisions in the
foregoing and other cases which individually or collectively may exceed
several hundred million dollars in amount could require extraordinary
appropriations or expenditure reductions and could have a material adverse
effect on the financial condition of the State, its agencies or
subdivisions. The Sponsors are unable to make any prediction concerning the
ultimate outcome or impact of decisions in any litigation affecting the
State.

MISSISSIPPI

RISK FACTORS--The financial condition of the State may be affected by
international, national and regional economic, political and environmental
conditions beyond the State's control, which in turn could affect the
market value and income of the obligations of the Mississippi Trust and
could result in a default with respect to such obligations. The following
information constitutes a brief summary of certain legal, governmental,
budgetary and economic matters which may or may not affect the financial
condition of the State, but does not purport to be a complete listing or
description of all such factors. None of the following information is
relevant to Puerto Rico or Guam Debt Obligations which may be included in
the Mississippi Trust. Such information was compiled from publicly
available information as well as from oral statements from various State
agencies. Although the Sponsors and their counsel have not verified the
accuracy of the information, they have no reason to believe that such
information is not correct.

Budgetary and Economic Matters. The State operates on a fiscal year
beginning July 1 and ending June 30, with budget preparations beginning on
approximately August 1, when all agencies requesting funds submit budget
requests to the Governor's Budget Office and the Legislative Budget Office.
The budgets, in the form adopted by the legislature, are implemented by the
Department of Finance and Administration.

State operations are funded by General Fund revenues, Educational
Enhancement Fund revenues and Special Fund receipts. For the fiscal year
ending June 30, 1996, approximately $4.7 billion in revenues were collected
by the Special Fund. The major source of such receipts was $2.24 billion
from federal grants-in-aid, including $1.40 billion for public health and
welfare and $358.1 million for public education.

The General Fund revenues are derived principally from sales, income,
corporate and excise taxes, profits from wholesale sales of alcoholic
beverages, interest earned on investments, proceeds from sales of various
supplies and services, and license fees. For the fiscal year ending June
30, 1996, of the $2.70 billion in General Fund receipts, sales taxes
accounted for 40.0%, individual income taxes for 27.4%, and corporate
income taxes for 9.7%. Sales taxes, the largest source of General Fund
revenues, can be adversely affected by downturns in the economy.

Mississippi's recent legalization of dockside gaming is having a
substantial impact on the State's revenues. With 30 casinos operating in
the State as of June 30, 1996, fiscal year 1996 gaming license fees

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and gaming tax revenues transferred to the General Fund for the State
amounted to $110.4 million as compared to $128.8 million in fiscal year
1995. Additionally, $34.2 million representing 25% in gaming tax revenues
have been dedicated to repayment of bonds issued for construction of
certain gaming-related highway projects.

Each year the legislature appropriates all General Fund, Educational
Enhancement Fund and most Special Fund expenditures. Those Special Funds
that are not appropriated by the legislature are subject to the approval of
the Department of Finance and Administration. In the fiscal year ending
June 30, 1996, approximately 59.1% of the General Fund was expended on
public and higher education. The areas of public health and public works
were the two largest areas of expenditures from the Special Fund. The
Education Enhancement Fund collections (funded from a 1% increase in sales
and use taxes enacted in 1992) totaled approximately $159.5 million in
fiscal year 1995. These funds are appropriated by the Legislature for the
purpose of providing additional funding for grades K-12, community colleges
and institutions of higher learning.

The Department of Finance and Administration has the authority to
reduce allocations to agencies if revenues fall below the amounts projected
during the budgeting phase and may also, in its discretion, restrict a
particular agency's monthly allotment if it appears that an agency may
deplete its appropriations prior to the close of the fiscal year. Despite
budgetary controls, the State has experienced cash flow problems in the
past. In the 1991 fiscal year, because State revenue collections fell below
projections and due to a General Fund cash balance on July 1, 1991 below
expectations, across-the-board budget reductions totaling approximately
$85.1 million were suffered by State agencies to avoid a year-end deficit.
In fiscal year 1992, total revenue collections were nearly $48 million
below projections. As a result of this shortfall, State agencies were
forced to implement an estimated 3.5% cut in their respective budgets.
However, fiscal year 1994 revenue collections were nearly $259.2 million or
12.15% above projections. For 1995, revenue collections nearly matched the
estimated revenues with a 0.01% shortfall. Fiscal year 1996 revenue
collections exceeded the budgeted estimates by 0.77%. Commencing with
fiscal year 1994, the aggregate appropriation from the General Fund is
limited to 98% of the sum of the official revenue estimate and the
estimated prior year ending cash balance. In an effort to prevent agencies
from being forced to implement budget cuts, the Mississippi legislature
authorized the Working Cash-Stabilization Fund in order to provide a
safeguard during stressed economic times. The Working Cash-Stabilization
Fund which reached its maximum balance of $201.0 million or 7.5% of the
General Fund appropriations for fiscal year 1996 can be used to meet
revenue and cash flow shortfalls as well as provide funds during times of
national disasters in the State.

Despite this growth, Mississippi ranks 31st among the 50 states, with
a population of 2.67 million people for 1995. As of May 1996, Mississippi's
unemployment rate was 6.3%, slightly above the State's 1995 level of 6.1%.
The nation's unemployment rate as of May 1996 was 5.6%.

As of May 1996 the manufacturing sector of the economy, the largest
employer in the State, employed approximately 245,000 persons or 22.6% of
the total nonagricultural employment. Within the manufacturing sector, the
four leading employers by product category were the lumber industry, the
apparel industry, the food products industry, and the furniture industry.
For 1995, the average employment for these industries was 27,800, 26,400,
28,300 and 27,900, respectively. Agriculture contributes significantly to
the State's economy as agriculture-related cash receipts amounted to $3.15
billion for 1994. The number of persons employed by the agricultural sector
of the State's labor force during May of 1996 was 45,100. The State
continues to be a large producer of cotton and timber and, as a result of
research and promotion, the agricultural sector has diversified into the
production of poultry, catfish, rice, blueberries and muscadines.

Mississippi has not been without its setbacks; for instance, the NASA
solid fuel rocket motor plant in Tishomingo County, which was originally
scheduled to open in 1995 and expected to result in

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approximately 3,500 jobs, was closed due to recent federal budget cuts.
Additionally, since the inception of legalized dockside gambling, six
casinos located in Mississippi have sought protection under federal
bankruptcy laws.

Total personal income in Mississippi increased 4.7% in 1995 as
compared to a 5.0% increase for the United States. However, Mississippi's
per capita income of $16,531 in 1995 was approximately 73% of the national
average. The number of bankruptcies filed in Mississippi during 1996, on an
annualized basis, is 13,946, a 17.8% increase over the 1995 level of
11,831.

Bonds. The State, counties, municipalities, school districts, and
various other districts are authorized to issue bonds for certain purposes.
Mississippi has historically issued four types of bonds: general
obligation, revenue, refunding and self-supporting general obligation. In
the 1994 and 1995 fiscal years, the State issued general obligation bonds
in amounts totaling $284.6 million and $311.9 million, respectively. In
fiscal year 1996, the State issued bonds totaling approximately $288.7
million. The total bond indebtedness of the State has increased from a
level of $432.5 million on July 1, 1987 to $1.25 billion as of July 1,
1996.

The issuance of bonds must be authorized by legislation governing the
particular project to be financed. Such legislation provides the State Bond
Commission, comprised of the Governor as Chairman, the State Attorney
General as Secretary and the State Treasurer as a member, with the
authority to approve and authorize the issuance of bonds.

The general obligation bonds of the State are currently rated Aa by
Moody's Investors Service, Inc. and AA by Standard and Poor's Ratings
Group. There can be no assurance that the conditions such ratings are based
upon will continue or that such ratings will not be revised downward or
withdrawn entirely by either or both agencies.

Litigation. The Attorney General's Office has reviewed the status of
cases in which the State is a defendant wherein the obligations of the
State's financial resources may be materially adversely affected. The
following cases, though not an entire list, are a representative sampling
of the most significant cases which could materially affect the State's
financial position: (1) a suit against the State regarding conditions at
its penal institutions; and (2) an action against the State Tax Commission
challenging the apportionment formula for taxation of multi-state
corporations.

Summary. The financial condition of the State of Mississippi may be
affected by numerous factors, most of which are not within the control of
the State or its subdivisions. The Sponsors are unable to predict to what
extent, if any, such factors would affect the ability of the issuers of the
Debt Obligations to meet payment requirements.

MISSOURI

RISK FACTORS--Revenue and Limitations Thereon. Article X, Sections 16-
24 of the Constitution of Missouri (the "Hancock Amendment"), imposes
limitations on the amount of State taxes which may be imposed by the
General Assembly of Missouri (the "General Assembly") as well as on the
amount of local taxes, licenses and fees (including taxes, licenses and
fees used to meet debt service commitments on debt obligations) which may
be imposed by local governmental units (such as cities, counties, school
districts, fire protection districts and other similar bodies) in the State
of Missouri in any fiscal year.

The State limit on taxes is tied to total State revenues for fiscal
year 1980-81, as defined in the Hancock Amendment, adjusted annually in
accordance with the formula set forth in the amendment, which

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adjusts the limit based on increases in the average personal income of
Missouri for certain designated periods. The details of the amendment are
complex and clarification from subsequent legislation and further judicial
decisions may be necessary. Generally, if the total State revenues exceed
the State revenue limit imposed by Section 18 of Article X by more than one
percent, the State is required to refund the excess. The State revenue
limitation imposed by the Hancock Amendment does not apply to taxes imposed
for the payment of principal and interest on bonds, approved by the voters
and authorized by the Missouri Constitution. The revenue limit also can be
exceeded by a constitutional amendment authorizing new or increased taxes
or revenue adopted by the voters of the State of Missouri.

The Hancock Amendment also limits new taxes, licenses and fees and
increases in taxes, licenses and fees by local governmental units in
Missouri. It prohibits counties and other political subdivisions
(essentially all local governmental units) from levying new taxes, licenses
and fees or increasing the current levy of an existing tax, license or fee
without the approval of the required majority of the qualified voters of
that county or other political subdivision voting thereon.

When a local government unit's tax base with respect to certain fees
or taxes is broadened, the Hancock Amendment requires the tax levy or fees
to be reduced to yield the same estimated gross revenue as on the prior
base. It also effectively limits any percentage increase in property tax
revenues to the percentage increase in the general price level (plus the
value of new construction and improvements), even if the assessed valuation
of property in the local governmental unit, excluding the value of new
construction and improvements, increases at a rate exceeding the increase
in the general price level.

School Desegregation Lawsuits. Desegregation lawsuits in St. Louis and
Kansas City continue to require significant levels of state funding and are
sources of uncertainty; litigation continues on many issues,
notwithstanding a 1995 U.S. Supreme Court decision favorable to the State
in the Kansas City desegregation litigation, court orders are
unpredictable, and school district spending patterns have proven difficult
to predict. The State paid $282 million for desegregation costs in fiscal
1994, $315 million for fiscal 1995 and $274 million for fiscal 1996. This
expense accounted for close to 7% of total state General Revenue Fund
spending in fiscal 1994 and 1995, and close to 5% in fiscal 1996.

Industry and Employment. While Missouri has a diverse economy with a
distribution of earnings and employment among manufacturing, trade and
service sectors closely approximating the average national distribution,
the national economic recession of the early 1980's had a
disproportionately adverse impact on the economy of Missouri. During the
1970's, Missouri characteristically had a pattern of unemployment levels
well below the national averages. However, since the 1980 to 1983 recession
periods Missouri unemployment levels generally approximated or slightly
exceeded the national average. A return to a pattern of high unemployment
could adversely affect the Missouri debt obligations acquired by the
Missouri Trust and, consequently, the value of the Units in the Trust.

The Missouri portions of the St. Louis and Kansas City metropolitan
areas contain approximately 1,949,956 and 1,039,241 residents,
respectively, constituting over fifty percent of Missouri's 1997 population
census of approximately 5,387,753. St. Louis is an important site for
banking and manufacturing activity, as well as a distribution and
transportation center, with eight Fortune 500 industrial companies (as well
as other major educational, financial, insurance, retail, wholesale and
transportation companies and institutions) headquartered there. Kansas City
is a major agribusiness center and an important center for finance and
industry. Economic reversals in either of these two areas would have a
major impact on the overall economic condition of the State of Missouri.
Additionally, the State of Missouri has a significant agricultural sector
which is experiencing farm-related problems comparable to those which are
occurring in other states. To the extent that these problems were to
intensify, there could possibly be an adverse impact on the overall
economic condition of the State of Missouri.

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Defense related business plays an important role in Missouri's economy.
There are a large number of civilians employed at the various military
installations and training bases in the State and recent action by the
Defense Base Closure and Realignment Commission will result in the loss of
a substantial number of civilian jobs in the St. Louis Metropolitan Area.
Further, aircraft and related businesses in Missouri are the recipients of
substantial annual dollar volumes of defense contract awards. The
contractor receiving the second largest dollar volume of defense contracts
in the United States in 1995 and 1996 was McDonnell Douglas Corporation
which lost the number one position it held in 1994 by reason of the merger
of the Lockheed and Martin companies. McDonnell Douglas Corporation, which
was acquired by The Boeing Company on August 1, 1997, is the State's
largest employer, currently employing approximately 22,900 employees in
Missouri. Recent changes in the levels of military appropriations and the
cancellation of the A-12 program has affected such Company in Missouri and
over the last four years it has reduced its Missouri work force by
approximately 30%. There can be no assurances there will not be further
changes in the levels of military appropriations, and, to the extent that
further changes in military appropriations are enacted by the United States
Congress, Missouri could be disproportionately affected. It is impossible
to determine what effect, if any, the acquisition of McDonnell Douglas
Corporation by the Boeing Company will have on the operations conducted in
Missouri by the former McDonnell Douglas Corporation. However, any shift or
loss of production operations now conducted in Missouri would have a
negative impact on the economy of the state and particularly on the economy
of the St. Louis metropolitan area.

NEW JERSEY

RISK FACTORS--Potential purchasers of Units of the New Jersey Trust
should consider the fact that the Trust's portfolio consists primarily of
securities issued by the State of New Jersey, its municipalities and
authorities and should realize the substantial risks associated with an
investment in such securities. The State's General Fund (the fund into
which all State revenues not otherwise restricted by statute are deposited)
experienced surpluses for fiscal years 1994 through 1996, and surpluses are
preliminarily estimated for 1997 and 1998. As of June 30, 1996, the
General Fund had a surplus of $442.0 million.

The State's diverse economic base consists of a variety of
manufacturing, construction and service industries supplemented by
recreational and tourist attractions and commercial agriculture. The
State's overall economy has slowly improved since the end of the nationwide
recession in 1992. Business investment expenditures and consumer spending
have also increased substantially in the State as well as in the nation.
Although employment remains low in the manufacturing sector, employment
gains have been recorded in business services, construction, and retail
sectors. Future economic difficulties in any of these industries could
have an adverse impact on the finances of the State or its municipalities
and could adversely affect the market value of the Bonds in the New Jersey
Trust or the ability of the respective obligors to make payments of
interest and principal due on such Bonds.

Certain litigation is pending against the State that could adversely
affect the ability of the State to pay debt service on its obligations
including suit relating to the following matters: (i) several labor unions
have challenged 1994 legislation mandating a revaluation of several public
employee pension funds which resulted in a refund of millions of dollars in
public employer contributions to the State and significant ongoing annual
savings to the State; (ii) several cases filed in the State courts have
challenged the basis on which recoveries of certain costs for residents in
State psychiatric hospitals and other facilities are shared between the
State Department of Human Services and the State's county governments, and
certain counties are seeking the recovery from the Department of costs they
have incurred for the maintenance of such residents; (iii) the County of
Passaic and other parties have filed suit alleging the State violated a
1984 consent order concerning the construction of a resource recovery
facility in that county; (iv) several Medicaid eligible children and the
Association for Children of New Jersey have filed suit claiming the
Medicaid reimbursement rates for services rendered to such children are
inadequate under federal law; (v)

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a coalition of churches and church leaders in Hudson County have filed suit
asserting the State-owned Liberty State Park in Jersey City violates
environmental standards; (vi) representatives of the trucking industry have
filed a constitutional challenge to annual hazardous and solid waste
licensure renewal fees; (vii) the New Jersey Hospital Association has filed
a constitutional challenge to the State's failure to provide funding for
charity care costs, while requiring hospitals to treat all patients
regardless of ability to pay; (viii) the Education Law Center filed a
motion compelling the State to close the spending gap between poor urban
school districts and wealthy rural school districts; (ix) a group of
insurance companies have filed a constitutional challenge to the State's
assessment of monies pursuant to the Fair Automobile Insurance Reform Act
of 1990; (x) a class action consisting of prisoners with serious mental
disorders has been filed against officers of the Department of Corrections,
alleging sex discrimination, violation of the Americans with Disabilities
Act of 1990, and constitutional violations; (xi) a class action has been
brought in federal court challenging the State's method of determining the
monthly needs of a spouse of an institutionalized person under the Medicare
Catastrophic Act; (xii) several suits have been filed against the State in
federal court alleging that the State committed securities fraud and
environmental violations in the financing of a new Atlantic City highway
and tunnel; (xiii) a class action has been filed against the State alleging
the State's breach of contract for not paying certain Medicare co-insurance
and deductibles; and (xiv) an action has been filed challenging the State's
issuance of bonds to fund the accrued liability in its pension funds under
the Pension Bond Financing Act of 1997.

Although there can be no assurance that such conditions will continue,
the State's general obligation bonds are currently rated Aa1 by Moody's and
AA+ by Standard and Poor's.

NEW MEXICO

RISK FACTORS--Driven by its private sector, the New Mexico state
economy and the economy of Albuquerque and its metropolitan area have
enjoyed vigorous economic growth in recent years. However, the rate of
growth slowed dramatically in 1996 and 1997 from the boom levels of the
1992-1994 period. The short term outlook continues to be good. However, the
strong job growth of the 1990-1995 period has slowed. Jobs lost as a
result of Levi Strauss plant closings in Albuquerque and Roswell and
expected losses as a result of a restructuring of Intel's work force at its
Rio Rancho plant, have dampened prospects for short term growth.

The State Economy. The Debt Obligations included in the Portfolio of
the New Mexico Trust may include special or general obligations of the
State or of the municipality or authority which is the issuer. Special
obligations are not supported by taxing powers. The risks, particular
source of payment and security for each of the Debt Obligations are
detailed in the instruments themselves and in related offering materials.
There can be no assurance concerning the extent to which the market value
or marketability of any of the Debt Obligations will be affected by the
financial or other condition of the State, or by changes in the financial
condition or operating results of underlying obligors. Further, there can
be no assurance that the discussion of risks disclosed in related offering
materials will not become incomplete or inaccurate as a result of
subsequent events.

According to reports of the Bureau of Business and Economic Research
of the University of New Mexico ("BBER") through December, 1997 and
covering reports of economic results for 1997, the rate of growth in the
economies of the State of New Mexico and the Albuquerque metropolitan area
has slowed. Although each remains healthy and personal income has continued
to increase, as well, further growth in employment and personal income is
expected to be well below the levels of the recent past.

New Mexico is benefitting from an influx of new manufacturing and
business services firms into the Rocky Mountain states, drawn by the
region's low wages, productive work force, relatively low tax burden and
quality of life. Although New Mexico is highly dependent on defense
spending, the State has

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so far escaped any major defense cuts. Job losses in defense related
activities which have occurred to date have been fairly minor from an
overall state perspective. Employment in the federal government sector is
expected to remain stable during 1998.

Employment in New Mexico's construction sector increased by 15,800
jobs, or by 55.6%, over the 1992-1995 period. Construction employment
peaked in 1995 and during the following two years 2,307 jobs were lost,
resulting in a 5.2% employment decline in this sector. At present,
construction no longer serves as a major source of job growth, although a
favorable interest rate environment and continued although slow economic
growth have sustained a relatively high level of activity. Single family
housing construction fell from 9,231 units in 1994 to approximately 8,200
units in 1997; apartment construction has remained steady at approximately
2,100 units.

The rate of growth in manufacturing employment slowed during 1996.
More than 5,000 new jobs have been added by the manufacturing sector since
1990, led by expansion of the Intel plant, Motorola, Philips Semiconductor
and Sumitomo, and the relocation of two significant manufactured housing
facilities in the Albuquerque MSA and numerous new dairy and food
processing operations in the eastern part of the State.

Mining employment has been spotty, with jobs added during 1997 in the
copper industry in the southwestern part of the State while layoffs or
furloughs hit the molybdenum and potash operations in northern and
southeastern New Mexico. The services and trade sectors saw small
advances, with trade affected by a weak tourism year during 1996 and a
slower rate of growth in real disposable income in New Mexico. The
government sector grew, with increases at the local government level
offsetting declines at both federal and state levels. The reclassification
during 1996 of employees of enterprises owned by Indian tribes and tribal
government into the local government sector, from the services,
construction and retail sectors, benefitted local government employment
statistics at the expense of the other sectors.

The Economy of Albuquerque and its Metropolitan Area. A significant
proportion of the New Mexico Trust's Portfolio may consist of Debt
Obligations of issuers located in, or whose activities may be affected by
economic conditions in, the Albuquerque MSA. (As of January 1, 1994, the
Albuquerque Metropolitan Statistical Area ("MSA") was redefined to include
Sandoval County, the location of Rio Rancho, as well as Valencia County and
Bernalillo County). Albuquerque is the largest city in the State of New
Mexico, accounting for roughly one-quarter of the State's population.
Located in the center of the State at the intersection of two major
interstate highways and served by both rail and air, Albuquerque is the
major trade, commercial and financial center of the State.

According to BBER reports, the rate of growth of the economy of the
Albuquerque MSA slowed dramatically during 1996 but was slightly stronger
than the statewide economy in 1997, fueled by moderate expansion in high
tech manufacturing and business services. The Albuquerque MSA accounts for
almost 47% of the jobs in New Mexico.

Non-agricultural employment in the Albuquerque MSA increased at a rate
of 2.1% during 1997, with an increase of 7,000 non-agricultural jobs. The
slowdown in growth during 1996 was evident across all sectors of the
economy other than the local government sector-- for which statistics were
impacted by the reclassification of employees of Indian enterprises noted
above -- and the financial/insurance/real estate sector. Over half of
nonagricultural civilian employment in the Albuquerque MSA is in the trade
and service sectors. Historically, the service sector has grown at roughly
twice the rate of growth of the trade sector. During 1995, services was the
fastest growth sector in the Albuquerque MSA, with employment increasing at
a rate of 8.7%. During 1996, the rate of growth slowed to 0.9%. The
importance of trade and services reflects Albuquerque's continuing role as
the trade and service center for the State and the larger region, which
includes southern Colorado and parts of eastern Arizona. People from these
areas continue to come

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to Albuquerque for major purchases and to shop at retail and warehouse
stores. Albuquerque's concentration of health care facilities and medical
personnel has made it a regional medical center, and despite the
uncertainty about future healthcare reforms, employment in the health
services industry has continued to grow. The significance of trade and
service also reflects the continued importance of tourism to the
Albuquerque economy. Albuquerque has benefitted from the recent fascination
with the Southwest and from efforts to promote the City and to attract
major conventions to the expanded Convention Center.

While it has declined in importance as a direct employer, the
government sector still accounts for 19.1 percent of the Albuquerque MSA's
total nonagricultural employment. Not included in this calculation are
about 6,600 service jobs at Sandia National Laboratories and about 5,100
military jobs at Kirtland Air Force Base. As of June 1997, the Albuquerque
Public Schools system, Sandia, Kirtland and the University of New Mexico
are the largest employers in the Albuquerque area. However, there is
considerable uncertainty over future funding for operations at Kirtland
Sandia. At Sandia, employment has remained steady. However, potential
future cuts in spending cast a cloud over the outlook. Many Sandia
employees are at or near retirement age and are believed to be likely to
remain in the Albuquerque area after retirement.

In 1993 and 1994, the construction sector led the Albuquerque economy
spurred by low interest rates, pent up demand for housing and retail and
public works construction projects. During 1995, construction employment
continued to increase, at a rate of approximately 6.4%, following three
consecutive years of annual increases that were close to 20%. A dramatic
change occurred during 1996, which saw construction employment actually
decline by 0.9%, largely because of a weak housing sector. During 1996,
authorizations for single family units declined slightly from prior year
levels, but authorizations for multi-family units saw a sharp reduction,
off by 36.8% from the prior year.

The manufacturing employment sector within the Albuquerque MSA has
added more than 5,000 jobs since the first quarter of 1992, a significant
portion of which related to high-tech and electronics manufacturing at
Intel, Motorola, Sumitomo and Philips Semiconductor. Employment in the
manufacturing sector continued to increase during 1996, but at a
significantly lesser rate (1.5%) than the rate achieved during each of the
three prior years. Rio Rancho, which is located approximately 20 miles
northwest of downtown Albuquerque in Sandoval County, has had considerable
success in attracting new manufacturing facilities. Employment at Intel
Corporation's Rio Rancho plant has seen steady, significant increases since
1988, to almost 6500. However, a restructuring of Intel's work force
before the close of 1998 is expected to result in a reduction of
approximately 200 jobs from the present level.

Income. According to U.S. Department of Commerce data, Albuquerque MSA
personal income grew at an annual rate of not less than 6.3% from 1986
through 1995, the most recent year for which the statistic is available. In
1994, annual per capita personal income for the Albuquerque MSA, the State
of New Mexico and the United States was $21,452, $18,161 and $23,348,
respectively. According to BBER, New Mexico's average wage in 1993 was 83.9
percent of the average U.S. wage ($21,703 versus $23,866) a fall from the
93.1 percent level which existed in 1981. This trend shows that with the
exception of the new jobs in the durable manufacturing sector, the new jobs
generated in recent periods have in many cases been low paying ones and
even in sectors such as retail trade and state and local government,
average wages have not kept pace with national averages.

Population. Population in the Albuquerque MSA is estimated at 670,092
for 1996. (The population of the State is estimated at 1,713,167.)

Outlook. As of December 1997, BBER projected slow, moderate near-term
prospects for the New Mexico state economy and pretty good prospects for
the Albuquerque MSA. At the state level, nonagricultural employment is
expected to increase by approximately 14,000 jobs (1.9%). Services is
expected to emerge as the strongest sector in 1998, as manufacturing is
constrained by the Levi Strauss

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layoffs and the Intel restructuring. Growth in tourist related services is
expected to continue to be strong, with the addition of new hotels and
motels presently under construction, and growth in the business services
sector will reflect recent success in attracting telemarketing firms to the
area. Personal income is forecasted to advance at approximately 4.5%.

For the Albuquerque MSA, the rate of expansion during 1998 is expected
to approximate 2.3%, the strongest in the State, led by services and
hightech manufacturing.

According to BBER's analysis, New Mexico has enjoyed a competitive
advantage over other states in attracting manufacturing, business services
and retail trade jobs since 1981, although the sharp declines in mining
throughout the 1980's and construction's bust in the second half of the
1980's tended to obscure this phenomenon. Recently, however, New Mexico's
job and personal income growth (respectively, 1.7% and 4.7% statewide
during 1997) has fallen far below the rates in other Western states.

The Sponsors believe that the information summarized above describes
some of the more significant general considerations relating to Debt
Obligations included in the New Mexico Trust. For a discussion of the
particular risks associated with each of the Debt Obligations and other
factors to be considered in connection therewith, reference should be made
to the Official Statements and other offering materials relating to each of
the Debt Obligations which are included in the portfolio of the New Mexico
Trust. The sources of the information set forth herein are official
statements, other publicly available documents, and statements of public
officials and representatives of the issuers of certain of the Debt
Obligations. While the Sponsors have not independently verified this
information, they have no reason to believe that such information is
incorrect in any material respect.

NEW YORK

RISK FACTORS--Prospective investors should consider the financial
difficulties and pressures which the State of New York and several of its
public authorities and municipal subdivisions have undergone. The following
briefly summarizes some of these difficulties and the current financial
situation, based principally on certain official statements currently
available; copies may be obtained without charge from the issuing entity,
or through the Agent for the Sponsors upon payment of a nominal fee. While
the Sponsors have not independently verified this information, they have no
reason to believe that it is not correct in all material respects.

New York State. For many years, there have been extended delays in
adopting the State's budget, repeated revisions of budget projections and
often significant revenue shortfalls (as well as increased expenses). These
developments reflect faster long-term growth in State spending than
revenues and the sensitivity of State revenues to economic factors, as well
as its substantial reliance on non-recurring revenue sources. The State's
general fund incurred cash basis deficits of $775 million, $1,081 million
and $575 million, respectively, for the 1990-1992 fiscal years. Measures to
deal with deteriorating financial conditions included transfers from
reserve funds, recalculating the State's pension fund obligations
(subsequently ruled illegal), hiring freezes and layoffs, reduced aid to
localities, sales of State property to State authorities, and additional
borrowings (including until 1993 issuance of additional short-term tax and
revenue anticipation notes payable out of impounded revenues in the next
fiscal year). The State's general fund realized surpluses of $671 million,
$1.54 billion, $445 million and $1.4 billion for the 1993, 1994, 1996 and
1997 fiscal years and a $241 million deficit for the 1995 fiscal year.

Approximately $5.0 billion of State general obligation debt was
outstanding at March 31, 1997. State supported debt (restated to reflect
LGAC's assumption of $4.7 billion obligations previously funded through
issuance of short-term debt) was $37.1 billion at March 31, 1997, up from
$9.8 billion in 1986.

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Standard & Poor's rates the State's general obligation bonds A (raised from
A- in August 1997 but still tied for lowest rating for any state). Moody's
rates State general obligation bonds A2. In July 1997, State officials
approved issuance of $7.3 billion in bonds by the Long Island Power
Authority to finance a partial takeover of the Long Island Lighting Company
(including refunding LILCO obligations from building the decommissioned
Shoreham nuclear power plant; LILCO agreed to invest $1.3 billion of the
remainder on Long Island and to drop property tax refund litigation against
various Long Island localities). The takeover is designed to reduce
electric rates by at least 14% over 10 years; an IRS ruling to waive
capital gains tax on LILCO's was issued in March 1998 but additional
approvals are needed. The Legislature in 1997 also increased the limits on
certain appropriation-backed debt for the Dormitory and Urban Development
Authorities.

The State budget to close a projected $4.8 billion gap for the State's
1993 fiscal year (including repayment of the fiscal 1992 short-term
borrowing) contained a combination of $3.5 billion of spending reductions
(including measures to reduce Medicaid and social service spending, as well
as further employee layoffs, reduced aid to municipalities and schools and
reduced support for capital programs), deferral of scheduled tax
reductions, and some new and increased fees. Nonrecurring measures
aggregated $1.18 billion.

To close a projected budget gap of nearly $3 billion for the fiscal
year ended March 31, 1994, the State budget contained various measures
including further deferral of scheduled income tax reductions, some tax
increases, $1.6 billion in spending cuts, especially for Medicaid, and
further reduction of the State's work force. The budget increased aid to
schools, and included a formula to channel more aid to districts with
lower-income students and high property tax burdens. State legislation
requires deposit of receipts from the petroleum business tax and certain
other transportation-related taxes into funds dedicated to transportation
purposes. Nevertheless, $516 million of these monies were retained in the
general fund during this fiscal year. The Division of the Budget has
estimated that non-recurring income items other than the $671 million
surplus from the 1993 fiscal year aggregated $318 million.

The budget for the fiscal year ended March 31, 1995, increased
spending by 3.8% (greater than inflation for the first time in six years).
It provided a tax credit for low income families and increased aid to
education, especially in the poorer districts. The State reduced coverage
and placed additional restrictions on certain health care services. Over $1
billion savings resulted from postponement of scheduled reductions in
personal income taxes for a fifth year and in taxes on hospital income;
another $1.5 billion came from non-recurring measures. The Governor in
January 1995 instituted $188 million in spending reductions (including a
hiring freeze) and $71 million of other measures to address a widening gap.

More than two months after the beginning of the 1996 fiscal year, the
State adopted a budget to close a projected gap of approximately $5
billion, including a reduction in income and business taxes. The financial
plan projected nearly $1.6 billion in savings from cost containment,
disbursement reestimates and reduced funding for social welfare programs
and $2.2 billion from State agency actions. Approximately $1 billion of the
gap-closing measures were non-recurring. The State Comptroller sued to
prevent reallocation of $110 million of reserves from a special pension
fund. In October 1995, the Governor released a plan to reduce State
spending by $148 million to offset risks that developed, including proposed
reductions in Federal aid and possible adverse court decisions.

To address a $3.9 billion projected budget gap for the fiscal year
that began April 1, 1996, in July 1996 the State adopted a budget that
includes $1.3 billion of non-recurring measures. A surplus of $1.4 billion
was realized, due primarily to higher than expected revenue and reduced
social service spending.

The financial plan for the 1998 fiscal year, adopted 126 days after it
began, used most of the 1997 surplus to close a budget gap estimated at
$2.3 billion. A surplus of $1.8 billion is projected; the Governor has
proposed to use a substantial portion of this to accelerate property tax
reductions, and has also proposed

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current State funding of certain construction projects. $11 billion of
spending increases (5.4% in the current year or twice the rate of
inflation), primarily for local assistance including $2.3 billion for
education, and $4.75 billion of tax cuts will be phased in over the next
five years, most after 1998. These features were sharply criticized by
bond raters and fiscal monitors as likely to create major financial
pressures beginning with the 1999 fiscal year (yet S&P subsequently
increased its rating of State general obligation debt as described
earlier). Use of non-recurring resources is estimated at $270 million.
Implementing last year's Federal welfare requirements, recipients under
both State and Federal programs generally will be required to work in
exchange for benefits, and benefits will generally terminate after 5 years.
State benefits will be denied to immigrants for the first year of U.S.
residence; Mayor Giuliani announced that the City will continue to provide
benefits to legal new immigrants (if needed) during this period. $530
million is reserved to help balance the 1999 fiscal year budget. The
Governor proposes to increase spending by 7.2% for the fiscal year
beginning April 1, 1998, and projected remaining budget gaps of $1.75
billion and $3.75 billion for the 2000 and 2001 fiscal years. The State
Comptroller has projected budget gaps of $2.6 billion and $4.8 billion for
these years, including uncertainty about receipt of $250 million annually
assumed from the proposed tobacco settlement. State and other estimates
are subject to uncertainties including the effects of federal legislation
and economic developments.

The State normally adjusts its cash basis balance by deferring until
the first quarter of the succeeding fiscal year substantial amounts of tax
refunds and other disbursements. For many years, it also paid in that
quarter more than 40% of its annual assistance to local governments.
Payment of these annual deferred obligations and the State's accumulated
deficit was substantially financed by issuance of short-term tax and
revenue anticipation notes shortly after the beginning of each fiscal year.
The New York Local Government Assistance Corporation ("LGAC") was
established in 1990 to issue $4.7 billion of long-term bonds over several
years, payable from a portion of the State sales tax, to fund certain
payments to local governments traditionally funded through the State's
annual seasonal borrowing. The legislation will normally prevent State
seasonal borrowing until an equal amount of LGAC bonds are retired. The
State's last seasonal borrowing was in May 1993.

Generally accepted accounting principles ("GAAP") for municipal
entities apply modified accrual accounting and give no effect to payment
deferrals. On an audited GAAP basis, reflecting payments by LGAC to local
governments out of proceeds from bond sales, the general fund realized
surpluses of $0.9 billion, $0.4 billion and $1.9 billion for the 1994, 1996
and 1997 fiscal years and a deficit of $1.4 billion for the 1995 fiscal
year. The remaining accumulated deficit at March 31, 1997 was $1.0
billion. The State asserts that the budget is balanced over the 1997 and
1998 fiscal years, but use of the 1997 fiscal year surplus to fund 1998
fiscal year expenses is projected to result in a $959 million deficit for
the 1998 fiscal year.

For decades, the State's economy has grown more slowly than that of
the rest of the nation as a whole. Part of the reason for this decline has
been attributed to the combined State and local tax burden, which is among
the highest in the nation. The State's dependence on Federal funds and
sensitivity to changes in economic cycles, as well as the high level of
taxes, may continue to make it difficult to balance State and local budgets
in the future. The total employment growth rate in the State has been below
the national average since 1984. The State lost 524,000 jobs in 1990-1992,
and in 1996 State employment remained 295,000 jobs lower than 1990.

New York City (the "City"). The City is the State's major political
subdivision. In 1975, the City encountered severe financial difficulties,
including inability to refinance $6 billion of short-term debt incurred to
meet prior annual operating deficits. The City lost access to the public
credit markets for several years and depended on a variety of fiscal rescue
measures including commitments by certain institutions to postpone demands
for payment, a moratorium on note payment (later declared
unconstitutional), seasonal loans from the Federal government under
emergency congressional legislation, Federal guarantees of certain

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City bonds, and sales and exchanges of bonds by The Municipal Assistance
Corporation for the City of New York ("MAC") to fund the City's debt.

MAC has no taxing power and pays its obligations out of sales taxes
imposed within the City and per capita State aid to the City. The State has
no legal obligation to back the MAC bonds, although it has a "moral
obligation" to do so. MAC is now authorized to issue bonds only for
refunding outstanding issues and up to $1.5 billion should the City fail to
fund specified transit and school capital programs. S&P increased its
rating of MAC bonds to AA in January 1998. MAC plans to covenant not to
issue additional parity or prior lien debt in the future other than
refunding bonds. The State also established the Financial Control Board
("FCB") to review the City's budget, four-year financial plans, borrowings
and major contracts. The FCB is required to impose a review and approval
process of the proposals if the City were to experience certain adverse
financial circumstances. The City's fiscal condition is also monitored by a
Deputy State Comptroller.

From 1989 through 1993, the gross city product declined by 10.1% and
employment, by almost 11%, while the public assistance caseload grew by
over 25%. The City's unemployment averaged 10.8%, 10.1%, 8.7% and 8.1% in
1992 through 1995. This is well above the rest of the State and the nation
as a whole. Although the City added more jobs in 1997 than any year since
1987, unemployment averaged 9.4% for the year. Even with new fraud
detection procedures (including fingerprinting) since January 1995, public
assistance recipients were still over 800,000 in 1998. A report by the
Citizens Budget Commission found that in 1996 most of the applicants were
eligible and were denied benefits due to administrative errors or reasons
other than fraud.

While the City, as required by State law, has balanced its budgets in
accordance with GAAP since 1981, this has required exceptional measures in
recent years. City expenditures grew faster than revenues each year since
1986, masked in part by a large number of non-recurring gap closing
actions. To eliminate potential budget gaps of $1-$3 billion each year
since 1988 the City has taken a wide variety of measures. In addition to
increased taxes and productivity increases, these have included hiring
freezes and layoffs, reductions in services, reduced pension contributions,
and a number of nonrecurring measures such as bond refundings, transfers of
surplus funds from MAC, sales of City property and tax receivables. The FCB
concluded that the City has neither the economy nor the revenues to do
everything its citizens have been accustomed to expect.

The City closed a budget gap for the 1993 fiscal year (estimated at
$1.2 billion) through actions including service reductions, productivity
initiatives, transfer of $0.5 billion surplus from the 1992 fiscal year and
$100 million from MAC. A November 1992 revision offset an additional $561
million in projected expenditures through measures including a refunding to
reduce current debt service costs, reduction in the reserve and an
additional $81 million of gap closing measures. Over half of the City's
actions to eliminate the gap were non-recurring.

The Financial Plan for the City's 1994 fiscal year relied on increases
in State and Federal aid, as well as the 1993 $280 million surplus and a
partial hiring freeze, to close a gap resulting primarily from labor
settlements and decline in property tax revenues. The Plan contained over
$1.3 billion of one-time revenue measures including bond refundings, sale
of various City assets and borrowing against future property tax receipts.
Interim expenditure reductions of approximately $300 million were
implemented. The FCB reported that although a $98 million surplus was
projected for the year (the surplus was actually $81 million), a $312
million shortfall in budgeted revenues and $904 million of unanticipated
expenses (including an unbudgeted increase of over 3,300 in the number of
employees and a record level of overtime), net of certain increased
revenues and other savings, resulted in depleting prior years' surpluses by
$326 million.

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The City's original Financial Plan for the fiscal year ended June 30, 1995,
proposed to eliminate a projected $2.3 billion budget gap through measures
including reduction of the City's workforce (achieved in substantial part
through voluntary severance packages funded by MAC), increased State and
Federal aid, a bond refinancing, reduced contributions to City pension
funds and sale of certain City assets. The Mayor's proposals include
efforts toward privatization of certain City services and agencies, greater
control of independent authorities and agencies, and reducing social
service expenditures. He also sought concessions from labor unions
representing City employees. As several of these measures failed to be
implemented, the City experienced lower than anticipated tax collections
and higher than budgeted costs (particularly overtime and liability claims)
during the year, various alternative measures were implemented, for an
aggregate of nearly $3.5 billion of gap closing measures. $1.9 billion of
these were non-recurring and, in the case of a second bond refinancing,
will increase City expenses for future years. Reduced maintenance of City
infrastructure could also lead to increased future expenses. In December
1994, the City Council rejected the Mayor's recommendations, adopted its
own budget revisions and sued to enforce them; the suit was dismissed and
the Mayor impounded funds to achieve his proposed expense reductions.

The City closed a projected $3.1 billion budget gap for the fiscal
year ended June 30, 1996. The Financial Plan reduced a wide range of City
services. City agency and labor savings were projected at $1.2 billion and
$600 million respectively. During the fiscal year, the Major implemented
several additional spending reductions as various proposals (including
projected State and Federal aid increases) failed to be implemented. An
additional debt refinancing was also made. Non-recurring measures
(including a $250 million payment from the MTA in exchange for an agreement
to issue $500 million in bonds over the next four years for transit
improvements and a $300 million sale of tax liens) rose to $1.3 billion.
One of the Mayor's privatization proposals has been to sell or lease City
hospitals. In August 1997 the Mayor announced plans to rebuild rather than
sell the Queens Hospital Center. The Appellate Division of the State
Supreme Court ruled in September 1997 that the Health and Hospitals
Corporation exceeded its authority in entering into a 99-year lease for
Coney Island Hospital. It ruled that the State would have to amend the law
authorizing HHC to sell or lease City hospitals. In October 1995 S&P
reduced its rating on Health and Hospitals Corporation debt to BBB- (its
lowest investment-grade rating), citing City failure to articulate a
coherent strategy for the hospital system. Other proposals including
mandatory managed care programs for Medicaid recipients have been blocked.
The City Comptroller predicted that certain reductions in Medicaid and
welfare expenditures may lead to job reductions and higher costs for other
programs. The Board of Education also faced reductions of $265 million in
State aid and $189 million in Federal aid.

For the fiscal year ended June 30, 1997, the City faced a projected
$2.6 billion gap including $1.7 billion of increased operating
expenditures, $800 million of increased debt service and a $150 million
decline in revenues. Gap-closing measures in the Financial Plan included
$1.2 billion of agency spending reductions and extension of the personal
income tax surcharge. In August 1996, the Major directed City agencies to
plan for $500 million in further spending reductions. A surplus of $1.4
billion, in large part because of the boom in the financial sector, was
used to prepay debt service due during the current and 1999 fiscal years.

For the fiscal year that began July 1, 1997, the City adopted a budget
to close a projected $1.6 billion gap, including $2.0 billion of non-
recurring measures. A surplus of at least $1.2 billion is expected. The
City proposes a discretionary transfer from fiscal 1998 of $920 million for
payment of 1999 debt service and $210 million for 2000 debt service. It
also proposes a tax reduction program totaling $237-$774 million a year for
each of the next four years, which is subject to State legislative
approval. Risks for fiscal 1999 include State failure to extend the
personal income tax surcharges (which the Speaker of the City Council has
opposed), additional airport rental payments from the Port Authority and a
projected $450 million of additional State and Federal aid. The timing of
receiving $200 million from sale of the New York Colliseum is also in
doubt. The City is also carrying $914 million of State education aid
claims as receivables, some nearly 10 years old. The State asserts that
about 40% of these claims have not been properly submitted. The

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City Comptroller has begun writing off claims more than 10 years past due.
The City may also be required to pay up to $125 million to MAC because 1998
expenditures exceed a ceiling established in a 1996 agreement. The Health
and Hospitals Corporation faces significant deficits. Board of Education
expenditures are projected to represent 28% of the City's total budget in
the 1998 fiscal year; the Stavisky-Goodman Act requires Board agreement to
reduce the allocations below the average for the three preceding fiscal
years.

Spending is projected to increase faster than revenue for the next
three years, leaving City-projected future budget gaps of $1.8 billion,
$2.0 billion and $1.9 billion, respectively, for the 2000, 2001 and 2002
fiscal years; fiscal monitors have significantly higher estimates. Fiscal
monitors have commented that the City needs to take significant additional
actions to work toward structural balance.

A major uncertainty is the City's labor costs, which represent about
50% of its total expenditures. Although the City workforce was reduced by
over 12,000 workers since January 1994, with wage and benefit increases and
overtime, wage costs continue to grow. Contracts with virtually all of the
City's labor unions expired in 1995. New labor agreements with unions for
86% of the City employees froze wages until 1997 but commit the City to
avoid layoffs until 1998, increase wages by 11% over the next three years
and fail to achieve any significant productivity savings. Costs will
increase by $1.2 billion for the 1999 fiscal year and over $2 billion each
year thereafter.

Budget balance may also be adversely affected by the effect of the
economy on economically sensitive taxes. The City also faces uncertainty
in its dependence on Federal and State aid. Federal and State welfare
reform provisions may require additional training programs to satisfy
workfare guidelines and also additional City expenditures for immigrants
disqualified. The State Supreme Court recently ruled that the City has
failed to determine the number of hours consistent with the Social Services
Law, which could result in fewer hours by workfare participants in the
future. The City filed a notice of appeal. There can be no assurance that
City pension contributions will continue to be reduced by investment
performance exceeding assumptions. Other uncertainties include additional
expenditures to combat deterioration in the City's infrastructure (such as
bridges, schools and water supply), the costs of closing the Fresh Kills
landfill (which may be accelerated by pending litigation), cost of the AIDS
epidemic and problems of drug addiction and homelessness. Elimination of
any additional budget gaps will require various actions, including by the
State, a number of which are beyond the City's control.

The City sold $2.4 billion, $2.4 billion and $1.1 billion of
short-term notes, respectively, during the 1996 1997 and 1998 fiscal years.
At December 31, 1997, there were outstanding $26.6 billion of City bonds
(not including City debt held by MAC), $3.6 billion of MAC bonds and $1.2
billion of City-related public benefit corporation indebtedness, each net
of assets held for debt service. Standard & Poor's and Moody's during the
1975-80 period either withdrew or reduced their ratings of the City's
bonds. Standard & Poor's reduced its rating of the City's general
obligation debt to BBB+ on July 10, 1995, citing the City's economy,
substantial retention of non-recurring revenues and optimistic revenue
projections in the budget. Moody's increased its rating of City bonds to A3
on February 24, 1998. City-related debt doubled since 1987, although total
debt declined as a percentage of estimated full value of real property. To
avoid additional financial demands on the 1997 fiscal year budget, the
Mayor proposed borrowing an additional $1.4 billion over the 1998-2001
fiscal years for school repairs. The City also anticipates spending about
$1 billion over the next ten years on its upstate watershed area in an
effort to avoid building a filtration plant, estimated to cost $7 billion;
there can be no assurance that these measures will satisfy Environmental
Protection Agency water purity standards. To prevent the City from
reaching the constitutional limit on its general obligation debt (based on
real estate values), the State in 1997 authorized creation of the New York
City Transitional Finance Authority, to sell up to $7.5 billion of
additional bonds. Bonds will be backed by City personal income and sales
tax revenues, to fund capital projects. A lawsuit challenging the
constitutionality of the Authority was dismissed; an appeal is pending.
The bonds are rated Aa3 by Moody's

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and AA by S&P. Despite the new authority, City bond issuances may reach
the debt limit in the 2000 fiscal year. The City's financing program
projects long-term financing during fiscal years 1998-2002 to aggregate
$25.6 billion, including $7.5 billion from the Transitional Finance
Authority and $6.2 billion of Water Authority financing. Debt service is
expected to reach 20% of City tax revenues by 2000, up from 12.3% in fiscal
year 1990 and 14% in fiscal year 1995. The City's latest Ten Year Capital
Strategy plans capital expenditures of $45.0 billion during 1998-2007 (94%
to be City funded). This plan assumes State repeal of the Wicks law
governing City contracting, for a saving of $1.6 billion in construction
costs over the 10-year period.

Other New York Localities. In 1995, other localities had an aggregate
of approximately $19.0 billion of indebtedness outstanding. $102.3 million
was for deficit financing. In recent years, several experienced financial
difficulties. A Financial Control Board was established for Yonkers in 1984
and a Municipal Assistance Corporation for Troy in 1995. In 1996, the
State purchased debt issued by Troy and Utica to avert defaults when those
bonds were not bought by others. Troy, Utica, Newburgh, Cohoes and Niagara
Falls general obligations are rated below investment grade. Buffalo, with
a minimum investment grade rating, is on CreditWatch with negative
implications. Pending proposals to increase State fiscal oversight of
local government finances, tax lien securitization and cash management were
not adopted in the 1997 State legislative session. A March 1993 report by
Moody's Investors Service concluded that the decline in ratings of most of
the State's largest cities in recent years resulted from the decline in the
State's manufacturing economy. Any reductions in State aid to localities
may cause additional localities to experience difficulty in achieving
balanced budgets. County executives have warned that reductions in State
aid to localities to fund future State tax reductions are likely to require
increased local taxes. If special local assistance were needed from the
State in the future, this could adversely affect the State's as well as the
localities' financial condition. Most localities depend on substantial
annual State appropriations. Legal actions by utilities to reduce the
valuation of their municipal franchises, if successful, could result in
localities becoming liable for substantial tax refunds.

State Public Authorities. In 1975, after the Urban Development
Corporation ("UDC"), with $1 billion of outstanding debt, defaulted on
certain short-term notes, it and several other State authorities became
unable to market their securities. From 1975 through 1987 the State
provided substantial direct and indirect financial assistance to UDC, the
Housing Finance Agency ("HFA"), the Project Finance Agency, the
Environmental Facilities Corporation and other authorities. Practical and
legal limitations on these agencies' ability to pass on rising costs
through rents and fees could require further State appropriations. In July
1996, the Public Authorities Control Board approved a $650 million
refinancing by the Empire State Development Corp. (formerly the UDC) to
bail out the deficit-ridden Job Development Authority. 17 State authorities
had an aggregate of $73.5 billion of debt outstanding at September 30,
1996, of which approximately $25.7 billion was State-supported. At March
31, 1997, approximately $0.3 billion of State public authority obligations
was State-guaranteed, $3.3 billion was moral obligation debt (including
$2.2 billion of MAC debt) and $22.5 billion was financed under
lease-purchase or contractual obligation financing arrangements with the
State. Various authorities continue to depend on State appropriations or
special legislation to meet their budgets.

The Metropolitan Transportation Authority ("M.T.A."), which oversees
operation of the City's subway and bus system by the City Transit Authority
(the "TA") and operates certain commuter rail lines, has required
substantial State and City subsidies, as well as assistance from several
special State taxes. The TA $186.3 million surplus for 1997 was used to
balance the 1998 budget. The Financial Plan forecasts cash-basis gaps of
$186 million in 1999, $257 million in 2000, $279 million in 2001 and $303
million in 2002.

Substantial claims have been made against the TA and the City for
damages from a 1990 subway fire and a 1991 derailment. The M.A.
infrastructure, especially in the City, needs substantial rehabilitation.
In July 1996 the State Legislature approved a $7.3 billion capital plan for
1997-1999, which includes $3.5

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billion to be raised by bonds backed by fares. The plan does not
contemplate further fare increases until 2000. The plan also projects $2.85
billion in expense reductions over the five years. Critics have questioned
whether many of the projected labor and other savings can be achieved. It
is anticipated that the M.A. and the TA will continue to require
significant State and City support.

Litigation. The State and the City are defendants in numerous legal
proceedings, including challenges to the constitutionality and
effectiveness of various welfare programs, alleged torts and breaches of
contract, condemnation proceedings and other alleged violations of laws.
Adverse judgments in these matters could require substantial financing not
currently budgeted. The State estimates unfavorable judgments of $364
million, of which $134 million is expected to be paid during the current
fiscal year. Claims in excess of $530 billion were outstanding against the
City at June 30, 1997, for which it estimated its potential future
liability at $3.5 billion, in addition to real estate certiorari
proceedings with an estimated liability of $378 million. City settlements
were $327 million in fiscal 1997, up from $175 million in fiscal 1990.
Several actions seek judgments that, as a result of an overestimate by the
State Board of Equalization and Assessment, the City's real estate tax levy
in 1993-1996 exceeded constitutional limits; if upheld, substantial tax
refunds would be due and this could also adversely affect the City's
constitutional debt limit.

Final adverse decisions in any of these cases could require
extraordinary appropriations at either the State or City level or both.

NORTH CAROLINA

RISK FACTORS--See Portfolio for a list of the Debt Obligations
included in the North Carolina Trust. The portions of the following
discussion regarding the financial condition of the State government may
not be relevant to general obligation or revenue bonds issued by political
subdivisions of the State. Those portions and the sections which follow
regarding the economy of the State are included for the purpose of
providing information about general economic conditions that may or may not
affect issuers of the North Carolina Debt Obligations. None of the
information is relevant to any Puerto Rico or Guam Debt Obligations which
may be included in the portfolio of the North Carolina Trust.

General obligations of a city, town or county in North Carolina are
payable from the general revenues of the entity, including ad valorem tax
revenues on property within the jurisdiction. Revenue bonds issued by North
Carolina political subdivisions include (1) revenue bonds payable
exclusively from revenue-producing governmental enterprises and (2)
industrial revenue bonds, college and hospital revenue bonds and other
"private activity bonds" which are essentially non-governmental debt issues
and which are payable exclusively by private entities such as non-profit
organizations and business concerns of all sizes. State and local
governments have no obligation to provide for payment of such private
activity bonds and in many cases would be legally prohibited from doing so.
The value of such private activity bonds may be affected by a wide variety
of factors relevant to particular localities or industries, including
economic developments outside of North Carolina. In addition, the Trust is
concentrated on Debt Obligations of North Carolina issuers and is subject
to additional risk from decreased diversification as well as factors that
may be particular to North Carolina or, in the case of revenue bonds
payable exclusively from private party revenues or from specific state non-
tax revenue, factors that may be particular to the related activity or
payment party.

Section 23-48 of the North Carolina General Statutes appears to permit
any city, town, school district, county or other taxing district to avail
itself of the provisions of Chapter 9 of the United States Bankruptcy Code,
but only with the consent of the Local Government Commission of the State
and of the holders of such percentage or percentages of the indebtedness of
the issuer as may be required by the

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Bankruptcy Code (if any such consent is required). Thus, although
limitations apply, in certain circumstances political subdivisions might be
able to seek the protection of the Bankruptcy Code.

State Budget and Revenues. The North Carolina State Constitution
requires that the total expenditures of the State for the fiscal period
covered by each budget not exceed the total of receipts during the fiscal
period and the surplus remaining in the State Treasury at the beginning of
the period. In November 1996, the voters of the State approved a
constitutional amendment giving the Governor the power to veto certain
legislative matters, including budgetary matters.

Since 1994, the State has had a budget surplus, in part as a result of
new taxes and fees and spending reductions put into place in the early
1990s. In addition, the State, like the nation, has experienced economic
recovery during the 1990s. The State budget is based upon estimated
revenues and a multitude of existing and assumed State and non-State
factors, including State and national economic conditions, international
activity and federal government policies and legislation. The unreserved
General Fund balance at June 30, 1997, the end of the 1996-97 fiscal year,
was approximately $292.2 million, and the reserved balance of the General
Fund was approximately $880.8 million.

In 1995, the North Carolina General Assembly repealed, effective for
taxable years beginning January 1, 1995, the tax levied on various forms of
intangible personal property. The legislature provided specific
appropriations to counties and municipalities from state to revenues to
replace the revenues those political subdivisions previously received
intangibles tax revenue. In addition, in the 1996 session the legislature
reduced the corporate income tax rate from 7.75% to 6.9% (phased in over
four years) reduced the food tax from 4% to 3%, and eliminated most
privilege license taxes as of January 1, 1997. As a result of the
comprehensive tax reductions, General Fund tax collections for 1995-96 grew
by only 1.0% over 1994-95, as opposed to the 6.4% growth that would have
occurred if such measures had not been taken.

In the 1996-97 Budget prepared by the Office of State Budget and
Management, it was projected that General Fund net revenues would increase
3% over 1995-96. In fact, actual General Fund net revenues for 1996-97
increased 8.3% over 1995-96. This increase resulted primarily from growth
in the North Carolina economy, which resulted in increased personal and
corporate income tax receipts.

It is unclear what effect these developments at the State level may
have on the value of the Debt Obligations in the North Carolina Trust.

Litigation. The following are cases pending in which the State faces
the risk of either a loss of revenue or an unanticipated expenditure. In
the opinion of the Department of State Treasurer, an adverse decision in
any of these cases would not materially adversely affect the State's
ability to meet its financial obligations.

Leandro, et al. v. State of North Carolina and State Board of
Education--In May 1994 students and boards of education in five counties in
the State filed suit in state Superior Court requesting a declaration that
the public education system of North Carolina, including its system of
funding, violates the North Carolina Constitution by failing to provide
adequate or substantially equal educational opportunities and denying due
process of law, and violates various statutes relating to public education.

On July 24, 1997, the North Carolina Supreme Court issued a decision
in the case. The Court upheld the present funding system against the claim
that it unlawfully discriminated against low wealth counties on the basis
that the Constitution does not require substantially equal funding and
educational advantages in all school districts. The Court remanded the
case for trial on the claim for relief based on the Court's conclusion that
the Constitution guarantees every child of the state an opportunity to
receive a sound basic education in North Carolina public schools. Five
other counties intervened and now allege claims for

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relief on behalf of their students' rights to a sound basic education on
the basis of the high proportion of at-risk students in their counties'
systems. The North Carolina Attorney General's Office believes that sound
legal arguments support the State's position on the outstanding claims.

Francisco Case - In August 1994, a class action lawsuit was filed in
state court against the Superintendent of Public Instruction and the State
Board of Education on behalf of a class of parents and their children who
are characterized as limited English proficient. The complaint alleges that
the State has failed to provide funding for the education of these students
and has failed to supervise local school systems in administering programs
for them. The complaint does not allege an amount in controversy, but asks
the Court to order the defendants to fund a comprehensive program to ensure
equal educational opportunities for children with limited English
proficiency. Discovery is underway, but no trial date has been set. The
North Carolina Attorney General's Office believes that sound legal
arguments supports the state's position.

Faulkenbury v. Teachers' and State Employees' Retirement System; Peele
v. Teachers' and State Employees' Retirement System; Woodard v. Local
Government Employees' Retirement System -- Plaintiffs are disability
retirees who brought class actions in state court challenging changes in
the formula for payment of disability retirement benefits and claiming
impairment of contract rights, breach of fiduciary duty, violation of other
federal constitutional rights, and violation of state constitutional and
statutory rights. The Superior Court issued an order ruling in favor of
plaintiffs. The Order was affirmed by the North Carolina Supreme Court. A
determination of the actual amount of the State's liability and the payment
process is being determined by the parties. The plaintiffs have submitted
documentation to the court asserting that the cost in damages and higher
prospective benefit payments to the plaintiffs and class members would
amount to $407 million. These amounts would be payable from the funds of
the Retirement systems.

The Bailey Case -- State and local government retirees filed a class
action suit in 1990 as a result of the repeal of the income tax exemptions
for state and local government retirement benefits. The original suit was
dismissed after the North Carolina Supreme Court ruled in 1991 that the
plaintiffs had failed to comply with state law requirements for challenging
unconstitutional taxes and the United States Supreme Court denied review.

In 1992, many of the same plaintiffs filed a new lawsuit alleging
essentially the same claims, including breach of contract, unconstitutional
impairment of contract rights by the State in taxing benefits that were
allegedly promised to be tax-exempt, and violation of several state
constitutional provisions. Thereafter, taxpayers have also filed
additional lawsuits claiming refunds of income taxes paid for tax years
through 1996. In May 1995, the trial court found that the repeal of the
tax exemption for state and local government retirement benefits that was
vested before August 1989 were unlawful and that such benefits remain
exempt from income taxation. Appeals have been taken from both sides and
the North Carolina Supreme Court has allowed discretionary review before
hearing by the Court of Appeals.

Potential refunds and interest are estimated to be $287.56 million for
the period through fiscal year 1997. Until this matter is resolved, any
additional potential refunds and interest will continue to accrue.
Furthermore, if the order of the Superior Court is upheld, its provisions
would apply prospectively to prevent future taxation of State and local
government retirement benefits that were vested before August 1989. The
North Carolina Attorney General's Office believes that sound legal
arguments support the State's position on the merits.

Patton v. State--In connection with the legislature's repeal of the
tax exemption for state retirees in 1989, certain adjustments were adopted
that reduced the state retirees' tax burden. In May 1995, federal retirees
filed a lawsuit in State court for tax refunds for the years 1989 through
1994 alleging that these adjustments also constitute unlawful
discrimination against federal retirees.

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This action is being held in abeyance pending the outcome in Bailey. Should
plaintiffs prevail in Bailey, such a result, these federal retirees allege,
would re-establish the disparity of treatment between state and federal
pension income which was held unconstitutional in Davis v. Michigan (1989).
In Davis, the United States Supreme Court ruled that a Michigan income tax
statute which taxed federal retirement benefits while exempting those paid
by state and local governments violated the constitutional doctrine of
intergovernmental tax immunity. At the time of the Davis decision, North
Carolina law contained similar exemptions in favor of state and local
retirees. Those exemptions were repealed prospectively, beginning with the
1989 tax year. All public pension and retirement benefits are now entitled
to a $4,000 annual exclusion. Potential refunds and interest are estimated
to be $585 million for the period through fiscal year 1997. Until this
matter is resolved, any additional potential refunds and interest will
continue to accrue. The repeal of the exemptions is challenged by state
and local government retirees in the Bailey case.

Smith, et al. v. Offerman and State of North Carolina, et al.--This
class action is related to litigation in Fulton Corporation v. Faulkner,
516 U.S. 325, 133 L.Ed.2d 796 (1995), a case filed by a single taxpayer.
On July 7, 1995, while the Fulton case was pending before the United States
Supreme Court, the Smith class action was commenced on behalf of all other
taxpayers who had complied with the requirements of the tax refund statute
N.C.G.S. 105-267, and would therefore be entitled to refunds if Fulton
prevailed on its refund claim. These original plaintiffs were later
designated Class A when a second group of plaintiffs were added. The new
class, denominated Class B, consisted of taxpayers who had paid the tax but
failed to comply with the tax refund statute. On February 21, 1996, the
United States Supreme Court held in Fulton that the State's intangibles tax
on shares of tax (by then repealed) violated the Commerce Clause of the
United States Constitution because it discriminated against stock issued by
corporations that do all or part of their business outside of North
Carolina. It remanded the case to the North Carolina Supreme Court to
consider remedial issues including whether the offending provision in the
statute (the taxable percentage deduction) was severable.

On February 10, 1997, the Supreme Court of North Carolina in the
Fulton remand proceeding severed the taxable deduction provision and
invited the General Assembly to determine the appropriate remedy for the
discriminatory tax treatment of eligible taxpayers who paid the tax but did
not benefit from the deduction. While the General Assembly considered the
remedial issues raised by the Fulton remand, the Smith plaintiffs moved for
judgment on their refund claims. On June 11, 1997, the trial judge in
Smith ordered refunds to be made for tax years 1991-1994 to the Class A
plaintiffs and dismissed the Class B claims. Refunds to Class A taxpayers,
totaling approximately $120,000,000, have substantially been paid, with
interest. The Class B plaintiffs appealed, and their appeal is pending in
the North Carolina Court of Appeals. The North Carolina Attorney General's
Office believes that sound legal arguments support dismissal of the Class B
claims and that the trial judge's ruling will be upheld on appeal.

Shaver v. Boyles, Refrow, and State of North Carolina--This class
action was filed on January 16, 1998, by intangibles taxpayers who paid
intangibles tax on shares of stock for tax years 1990-1994 and did not
receive refunds because they failed to meet the tax refund statute
requirements. These are the same taxpayers as Class B plaintiffs in Smith,
but they claim refund entitlement under an alleged alternative theory.
They claim refunds of approximately $131,750,000 for tax years 1991-1994
and $80,000,000 for tax year 1990. The North Carolina Attorney General's
Office believes that sound legal arguments support dismissal of this
action.

The State is involved in numerous other claims and legal proceedings,
many of which normally occur in governmental operations; however, the North
Carolina Attorney General does not expect any of the other outstanding
lawsuits to materially adversely affect the State's ability to meet its
financial obligations.

General. The population of the State has increased 13% from 1980, from
5,895,195 to 6,656,810 as reported by the 1990 federal census and the State
rose from twelfth to tenth in population. The State's

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estimate of population as of July 1997 is 7,436,690. Notwithstanding its
rank in population size, North Carolina is primarily a rural state, having
only six municipalities with populations in excess of 100,000.

The labor force has undergone significant change during recent years
as the State has moved from an agricultural to a service and goods
producing economy. Those persons displaced by farm mechanization and farm
consolidations have, in large measure, sought and found employment in other
pursuits. Due to the wide dispersion of non-agricultural employment, the
people have been able to maintain, to a large extent, their rural
habitation practices. During the period 1980 to 1996, the State labor force
grew about 33% (from 2,855,200 to 3,796,200). Per capita income during the
period 1985 to 1996 grew from $11,870 to $22,010, an increase of 85.4%.

The current economic profile of the State consists of a combination of
industry, agriculture and tourism. As of July 1997, the State was reported
to rank tenth among the states in non-agricultural employment and eighth in
manufacturing employment. Employment indicators have varied somewhat in the
annual periods since June of 1990, but have demonstrated an upward trend
since 1991. The following table reflects the fluctuations in certain key
employment categories.

Category June 1993 June 1994 June 1995 June 1996 June 1997
(all seasonally
adjusted)
<S> <C> <C> <C> <C> <C>

Civilian Labor Force 3,504,000 3,560,000 3,578,000 3,704,000 3,797,000

Nonagricultural 3,203,400 3,358,700 3,419,100 3,506,000 3,620,300
Employment

Goods Producing 993,600 1,021,500 1,036,700 1,023,800 1,041,000
Occupations
(mining, construction
and manufacturing)

Service Occupations 2,209,800 2,337,200 2,382,400 2,482,400 2,579,300

Wholesale/Retail 723,200 749,000 776,900 809,100 813,500
Occupations

Government Employees 515,400 554,600 555,300 570,800 579,600

Miscellaneous Services 676,900 731,900 742,200 786,100 852,500

Agricultural Employment 88,400 53,000 53,000 53,000 [not available]
</TABLE>

The seasonally adjusted unemployment rate in July 1997 was estimated
to be 3.7% of the labor force, as compared with 4.8% nationwide.

North Carolina's economy continues to benefit from a vibrant
manufacturing sector. Manufacturing firms employ approximately 24% of the
total non-agricultural workforce. North Carolina has the second highest
percentage of manufacturing workers in the nation. The State's annual value
of manufacturing shipments totals $142 billion, ranking the State eighth in
the nation. The State leads the nation in the production of textiles,
tobacco products, furniture and fiberoptic cable, and is among the largest
producers of pharmaceuticals, electronics and telecommunications equipment.
More than 700 international firms have established a presence in the State.
Charlotte is now the second largest financial center in the country, based
on assets of banks headquarters there. The strength of the State's
manufacturing sector also supports the growth in exports; the latest annual
statistics show $8.76 billion in exports, making North Carolina one of the
few states with an export trade surplus.

In 1996, the State's gross agricultural income of nearly $8.0 billion
placed it eighth in the nation in gross agricultural income. The State
ranks third in the nation in net farm income. According to the State
Commissioner of Agriculture, in 1996 the State ranked first in the nation
in the production of flue-cured tobacco, total tobacco, turkeys and sweet
potatoes; second in hog production, trout, and the production of cucumbers
for pickles; third in the value of net farm income poultry and egg
products, and greenhouse and

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nursery income; fourth in commercial broilers, peanuts, blueberries and
strawberries; and fifth in burley tobacco.

The diversity of agriculture in North Carolina and a continuing push
in marketing efforts have protected farm income from some of the wide
variations that have been experienced in other states where most of the
agricultural economy is dependent on a small number of agricultural
commodities. North Carolina is the third most diversified agricultural
state in the nation.

Tobacco production, which had been the leading source of agricultural
income in the State, declined in 1995. The poultry industry is now the
leading source of gross agricultural income, at 29%, and the pork industry
provides 22% of the total agricultural income. Tobacco farming in North
Carolina has been and is expected to continue to be affected by major
Federal legislation and regulatory measures regarding tobacco production
and marketing and by international competition. The tobacco industry
remains important to North Carolina providing approximately 13% of gross
agricultural income.

The number of farms has been decreasing; in 1997 there were
approximately 57,000 farms in the State down from approximately 72,000 in
1987, (a decrease of about 20% in ten years). However, a strong
agribusiness sector supports farmers with farm inputs (agricultural
chemicals and fertilizer, farm machinery, and building supplies) and
processing of commodities produced by farmers (vegetable canning and
cigarette manufacturing). North Carolina's agriculture industry, including
food, fiber and forest products, contributes over $45 billion annually to
the State's economy.

The North Carolina Department of Commerce, Travel and Tourism Division
indicates that travel and tourism is increasingly important to the State's
economy. Travel and tourism's $9.8 billion economic impact in 1996
represents a 6.5% increase over 1995. The North Carolina travel and
tourism industry directly supports 167,100 jobs or 4.7% of total non-
agricultural employment.

Bond Ratings. Currently, Moody's rates North Carolina general
obligation bonds as Aaa and Standard & Poor's rates such bonds as AAA.
Standard & Poor's also reaffirmed its stable outlook for the State in
December 1997. Standard & Poor's reports that North Carolina's rating
reflects the State's strong economic characteristics, sound financial
performances, and low debt levels.

The Sponsors believe the information summarized above describes some
of the more significant events relating to the North Carolina Trust. The
sources of this information are the official statements of issuers located
in North Carolina, State agencies, publicly available documents,
publications of rating agencies and statements by, or news reports of
statements by State officials and employees and by rating agencies. The
Sponsors and their counsel have not independently verified any of the
information contained in the official statements and other sources, and
counsel have not expressed any opinion regarding the completeness or
materiality of any matters contained in this Prospectus other than the tax
opinions set forth below under North Carolina Taxes.

OHIO

RISK FACTORS--The following summary is based on publicly available
information which has not been independently verified by the Sponsors or
their legal counsel.

Employment and Economy. Economic activity in Ohio, as in many other
industrially developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Ohio ranked fourth in the nation in
1991 gross state product derived from manufacturing. Although manufacturing
(including auto-related manufacturing) remains an important part of Ohio's
economy, the greatest growth in employment

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in Ohio in recent years, consistent with national trends, has been in the
non-manufacturing area. Payroll employment in Ohio peaked in the summer of
1993, decreased slightly but then reached a new high in 1997. Growth in
recent years has been concentrated among non-manufacturing industries, with
manufacturing tapering off since its 1969 peak. Over three-fourths of the
payroll workers in Ohio are employed by non-manufacturing industries.

The average monthly unemployment rate in Ohio was 4.3% in November,
1997.

With 14.2 million acres in farm land, agriculture and related sectors
are a very important segment of the economy in Ohio, providing an estimated
935,000 jobs or approximately 15.9% of total Ohio employment.

Ohio continues to be a major "headquarters" state. Of the top 500
corporations (industrial, commercial and service) based on 1995 revenues as
reported in 1996 by Fortune magazine, 30 had headquarters in Ohio, placing
Ohio sixth as a "headquarters" state for corporations.

The State Budget, Revenues and Expenditures and Cash Flow. Ohio law
effectively precludes the State from ending a fiscal year or a biennium
with a deficit. The State Constitution provides that no appropriation may
be made for more than two years and consistent with that provision the
State operates on a fiscal biennium basis. The current fiscal biennium runs
from July 1, 1997 through June 30, 1999.

Under Ohio law, if the Governor ascertains that the available revenue
receipts and balances for the general revenue fund ("GRF") or other funds
for the then current fiscal year will probably be less than the
appropriations for the year, he must issue orders to State agencies to
prevent their expenditures and obligations from exceeding the anticipated
receipts and balances.

State and national fiscal uncertainties during the 1992-93 biennium
required several actions to achieve the ultimate positive GRF ending
balances. As an initial action, to address a subsequently projected fiscal
year 1992 imbalance, the Governor ordered most state agencies to reduce GRF
appropriation spending in the final six months of that year by a total of
approximately $184 million. Debt service obligations were not affected by
this order. Then in June 1992, $100.4 million was transferred to the GRF
from the budget stabilization fund and certain other funds. Other revenue
and spending actions, legislative and administrative, resolved the
remaining GRF imbalance for fiscal year 1992.

As a first step toward addressing a then estimated $520 million GRF
shortfall for fiscal year 1993, the Governor ordered, effective July 1,
1992, selected GRF appropriations reductions totalling $300 million (but
such reductions did not include debt service). Subsequent executive and
legislative actions provided for positive biennium-ending GRF balances. The
GRF ended the 1992-93 biennium with a balance of approximately $111 million
and a cash balance of approximately $394 million.

The GRF appropriations act for the 1994-95 biennium provided for total
GRF biennial expenditures of approximately $30.7 billion. The 1994-95
biennium ending GRF balance was $928 million.

The GRF appropriations act for the 1996-1997 biennium provided for
total GRF biennial expenditures of approximately $33.5 billion. The 1996-
1997 biennium GRF ending balance was over $834 million.

The GRF appropriations act for the current biennium provides for total
GRF biennial expenditures of over $36 billion. Necessary GRF debt service
was provided for in the act. Litigation pending in federal District Court
and in the Ohio Court of Claims contests the Ohio Department of Human
Services ("ODHS") prior Medicaid financial eligibility rules for married
couples where one spouse is living in a nursing facility and the other
spouse resides in the community. ODHS promulgated new eligibility rules
effective January 1, 1996. ODHS is appealing an order of the federal court
directing it to provide notice to persons potentially

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affected by the former rules from 1990 to 1995. It is not possible at this
time to state whether this appeal will be successful or, should plaintiffs
prevail, the period (beyond the current fiscal year) during which necessary
additional Medicaid expenditures would have to be made. Plaintiffs have
estimated total additional Medicaid expenditures at $600,000,000 for the
retroactive period and, based on current law, it is estimated that the
State's share of those additional expenditures is approximately
$240,000,000. The Court of Claims has certified the action as a class
action.

Because GRF cash receipts and disbursements do not precisely coincide,
temporary GRF cash flow deficiencies often occur in some months of a fiscal
year, particularly in the middle months. Statutory provisions provide for
effective management of these temporary cash flow deficiencies by
permitting adjustment of payment schedules and the use of total operating
funds. In fiscal year 1997, a GRF cash flow deficiency occurred in four
months with the highest being approximately $565 million. The OBM projects
GRF cash flow deficiencies will occur in eight months in fiscal year 1998.

State and State Agency Debt. The Ohio Constitution prohibits the
incurrence or assumption of debt by the State without a popular vote except
for the incurrence of debt to cover causal deficits or failures in revenue
or to meet expenses not otherwise provided for, but which are limited to
$750,000 or to repel invasions, suppress insurrection or defend the State
in war. Under interpretations by Ohio courts, revenue bonds of the State
and State agencies that are payable from net revenues of or related to
revenue producing facilities or categories of such facilities are not
considered "debt" within the meaning of these constitutional provisions.

From 1921 to date, Ohio voters approved fifteen constitutional
amendments authorizing the incurrence of State debt to which taxes or
excises were pledged for payment. The only such tax-supported debt still
authorized to be incurred are highway, coal development, local
infrastructure and natural resources general obligation bonds.

Not more than $1.2 billion in certain state highway obligations may be
outstanding at any time and not more than $220 million can be issued in a
fiscal year. As of January 8, 1998, approximately $170 million of such
highway obligations were outstanding. The authority to issue certain other
highway obligations expired in December, 1996; however, as of January 8,
1998 approximately $358 million of such highway obligations were
outstanding. Not more than $100 million in State obligations for coal
development may be outstanding at any one time. As of January 8, 1998,
approximately $31 million of such coal obligations were outstanding. Not
more than $2.4 billion of State general obligation bonds to finance local
capital infrastructure improvements may be issued at any one time, and no
more than $120 million can be issued in a calendar year. As of January 8,
1998, approximately $947 million of those bonds were outstanding. Not more
than $200 million of natural resources bonds may be outstanding at any
time, and no more than $50 million can be issued in any year. As of January
8, 1998, approximately $91 million of those bonds were outstanding.

The Ohio Constitution authorizes State bonds for certain housing
purposes, but tax moneys may not be obligated or pledged to those bonds. In
addition, the Ohio Constitution authorizes the issuance of obligations of
the State for certain purposes, the owners or holders of which are not
given the right to have excises or taxes levied by the State legislature to
pay principal and interest. Such debt obligations include the bonds and
notes issued by the Ohio Public Facilities Commission, the Ohio Building
Authority and the Treasurer of State.

The Treasurer of State has been authorized to issue bonds to finance
approximately $538.6 million of capital improvements for local elementary
and secondary public school facilities (approximately $224 million is
issued). Debt service on the obligations is payable from State resources.

A statewide economic development program assists with loans and loan
guarantees, and the financing of facilities for industry, commerce,
research and distribution. The law authorizes the issuance of State bonds

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and loan guarantees secured by a pledge of portions of the State profits
from liquor sales. The General Assembly has authorized the issuance of
these bonds by the State Treasurer, with a maximum amount of $300 million,
subject to certain adjustments, currently authorized to be outstanding at
any one time. A 1996 issue of approximately $168.7 million of taxable bonds
refunded previously outstanding bonds. The highest future fiscal year debt
service on the outstanding bonds, which are payable through 2022, is
approximately $16 million.

An amendment to the Ohio Constitution authorizes revenue bond
financing for certain single and multifamily housing. No State resources
are to be used for the financing. As of January 30, 1998, the Ohio Housing
Financing Agency, pursuant to that constitutional amendment and
implementing legislation, had sold revenue bonds in the aggregate principal
amount of approximately $309.8 million for multifamily housing and
approximately $4.72 billion for single family housing. A constitutional
amendment adopted in 1990 authorizes greater State and political
subdivision participation in the provision of housing for individuals and
families. The General Assembly could authorize State borrowing for this
purpose by the issuance of State obligations secured by a pledge of all or
a portion of State revenues or receipts, although the obligations may not
be supported by the State's full faith and credit.

A constitutional amendment approved in 1994 pledges the full faith and
credit and taxing power of the State to meet certain guarantees under the
State's tuition credit program. Under the amendment, to secure the tuition
guarantees, the General Assembly is required to appropriate moneys
sufficient to offset any deficiency that may occur from time to time in the
trust fund that provides for the guarantee and at any time necessary to
make payment of the full amount of any tuition payment or refund required
by a tuition payment contract.

Schools and Municipalities. The 612 public school districts and 49
joint vocational school districts in the State receive a major portion
(approximately 44%) of their operating funds from State subsidy
appropriations, the primary portion known as the Foundation Program. They
also must rely heavily upon receipts from locally-voted taxes. Some school
districts in recent years have experienced varying degrees of difficulty in
meeting mandatory and discretionary increased costs. Current law prohibits
school closings for financial reasons.

Original State basic aid appropriations for the 1992-93 biennium
provided for an increase in school funding compared to the preceding
biennium. The reduction in appropriations spending for fiscal year 1992
included a 2.5% overall reduction in the annual Foundation Program
appropriations and a 6% reduction in other primary and secondary education
programs. The reductions were in varying amounts, and had varying effects,
with respect to individual school districts. State appropriations for
primary and secondary education for the 1994-95 biennium provided for 2.4%
and 4.6% increases in basic aid for the two fiscal years of the biennium.
State appropriations for primary and secondary education for the 1996-97
biennium provided for a 13.6% increase in school funding appropriations
over those in the preceding biennium. State appropriations for the current
1998-99 biennium provide for a 14.5% increase over the previous biennium.

In years prior to fiscal year 1990, school districts facing deficits
at year end had to apply to the State for a loan from the Emergency School
Advancement Fund. Legislation replaced the Fund with enhanced provisions
for individual district local borrowing, including direct application of
Foundation Program distributions to repayment if needed. In fiscal year
1995, 29 school districts received loans totaling approximately $71.1
million. In fiscal year 1996, 20 school districts have received loans
totaling approximately $87.2 million. In fiscal year 1997, 12 school
districts have received loans totaling approximately $113 million. As of
January 8, 1998, one school district has received approval for a loan of
approximately $17.2 million.

The Ohio Supreme Court concluded, in a decision released March 24,
1997, that major aspects of the State's system of school funding are
unconstitutional. The Court ordered the State to provide for and fund

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sufficiently a system complying with the Ohio Constitution, staying its
order for a year to permit time for responsive corrective actions by the
Ohio General Assembly. In response to a State motion for reconsideration
and clarification of its opinion, the Court, on April 25, 1997, indicated
that property taxes may still play a role in, but can no longer by the
primary means of, school funding. The Court also confirmed that contractual
repayment provisions of certain debt obligations issued for school funding
will remain valid until the stay terminates.

Various Ohio municipalities have experienced fiscal difficulties. Due
to these difficulties, the State established procedures to identify and
assist cities and villages experiencing defined "fiscal emergencies". A
commission appointed by the Governor monitors the fiscal affairs of
municipalities facing substantial financial problems. As of January 8,
1998, this act has been applied to eleven cities and thirteen villages. The
situations in nine cities and nine villages have been resolved and their
commissions terminated.

State Employees and Retirement Systems. The State has established five
public retirement systems which provide retirement, disability retirement
and survivor benefits. Federal law requires newly-hired State employees to
participate in the federal Medicare program, requiring matching employer
and employee contributions, each now 1.45% of the wage base. Otherwise,
State employees covered by a State retirement system are not currently
covered under the federal Social Security Act. The actuarial evaluations
reported by these five systems showed aggregate unfunded accrued
liabilities of approximately $13,816.1 million covering both State and
local employees.

The State engages in employee collective bargaining and currently
operates under staggered two-year agreements with all of its 21 bargaining
units. The bargaining unit agreements with the State expire at various
times in 1997.

Health Care Facilities Debt. Revenue bonds are issued by Ohio counties
and other agencies to finance hospitals and other health care facilities.
The revenues of such facilities consist, in varying but typically material
amounts, of payment from insurers and third-party reimbursement programs,
such as Medicaid, Medicare and Blue Cross. Consistent with the national
trend, third-party reimbursement programs in Ohio have begun new programs,
and modified benefits, with a goal of reducing usage of health care
facilities. In addition, the number of alternative health care delivery
systems in Ohio has increased over the past several years. For example, the
number of health insuring corporations licensed by the Ohio Department of
Insurance increased from 12 on February 14, 1983 to 40 as of January 29,
1998. Due in part to changes in the third-party reimbursement programs and
an increase in alternative delivery systems, the health care industry in
Ohio has become more competitive. This increased competition may adversely
affect the ability of health care facilities in Ohio to make timely
payments of interest and principal on the indebtedness.

OREGON

RISK FACTORS--Introduction. Oregon's public finances were dramatically
altered in November 1990 by the adoption of Ballot Measure No. 5 by the
voters of the State of Oregon. The Measure, which amended the Oregon
Constitution by the addition of a new Article XI, Section 11b, limited
property taxes for non-school government operations to $10 per $1,000 of
real market value beginning in the 1991-92 fiscal year. Property taxes for
school operations were limited to $15 per $1,000 of real market value in
the 1991-92 fiscal year, while ultimately declining to $5 per $1,000 of
real market value in the 1995-96 fiscal year. The Measure also required the
State of Oregon to use the State General Fund revenues to pay school
districts replacement dollars through the 1995-96 fiscal year for most of
the revenues lost by the school districts because of the Measure's
limitations on their tax levies.

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The State Legislative Revenue Office reports that, as a result of Ballot
Measure No. 5, non-school districts lost approximately $59.0 million of
revenues during the 1993-95 fiscal biennium, and school districts lost
$1.604 billion of tax revenues in the 1993-95 fiscal biennium.

The Measure contains many confusing and ill-defined terms, which may
ultimately be resolved by litigation in Oregon courts. In an attempt to
define some of these terms, and to provide guidance to Oregon
municipalities, the 1991 Oregon Legislature approved a comprehensive
revision of the statutes applicable to the issuance of municipal debt in
Oregon. A section of the 1991 legislation, which excluded tax increment
financing for urban renewal bonds indebtedness from the limits of Ballot
Measure No. 5, was declared invalid by the Oregon Supreme Court in
September, 1992. The Court, which affirmed an earlier ruling of the Oregon
Tax Court, determined that tax increment financing plans imposed a "tax" on
property subject to the limitations of Ballot Measure No. 5. A proposed
State constitutional amendment which would have revalidated tax increment
financing was referred to the Oregon voters in May 1993 and rejected. The
City of Portland had outstanding $70.6 million in principal amount of urban
renewal bonds as of June 30, 1996. The Portland City Council has committed
the City to honor the payment of the urban renewal bonds from alternative
sources.

The Measure defines the term "tax" as "any charge imposed by a
governmental unit upon property or upon a property owner as a direct
consequence of ownership of that property," excepting only from that
definition "incurred charges and assessments for local improvements." All
Oregon issuers are required to analyze the charges they assess to determine
if they constitute "taxes," which are then limited by the constraints of
the Measure. Moreover, debt service payments for revenue and special
assessment bonds are required to be reviewed in the light of the Measure to
determine if the charges made by the municipal issuer for these debt
service payments will constitute "taxes" limited by the Measure. The
comprehensive legislative revision of Oregon municipal debt contains
statutory guidelines to assist a municipality in determining if the charges
assessed are "taxes" limited under the Measure.

Debt service on bonded indebtedness may be adversely affected by
Ballot Measure No. 5 if the tax levied to provide funds for the servicing
of the debt will be included in the calculation of the maximum permitted
tax levy under the Measure. Taxes levied to pay for bonded debt will
generally be included in the limitations prescribed by the Measure, unless

* The bonded indebtedness was specifically authorized by the Oregon
Constitution (as, for example, the Oregon Veterans' Bonds), or

* (i) The bonded indebtedness was incurred or will be incurred "for
capital construction or improvements," (ii) the bonds issued for the
capital construction or improvements are general obligation bonds, and
(iii) the bonds were either issued before November 6, 1990, or, if issued
after that date, were approved by the electors of the issuer.

To provide for this limitation on the authority to tax, the Oregon
legislation creates two classifications of bonds secured by the taxing
authority of a municipal issuer: "general obligation bonds," which are
bonds secured by an authority to tax unlimited by the Measure, and "limited
tax bonds," which are bonds secured by an authority to levy taxes only
within the overall limits imposed on a municipal issuer by the Measure.

November 1996 Ballot Measures. Oregon voters will be asked to consider
23 ballot measures at the November 1996 general election. These ballot
measures may have direct and indirect impacts on the finances of the State
and its municipal institutions. The net financial effect of these ballot
measures is not possible to gauge at this time, but the approval of several
of these ballot measures (whether individually or cumulatively, if more
than one ballot measure were approved) could adversely effect the ability
of Oregon issuers to service their outstanding debt and to issue new debt.

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Ballot Measure 47, for example, would reduce property taxes through the
1997-98 fiscal year based on prior year levels and would limit growth in
property taxes in subsequent years to 3 percent a year, with certain
exceptions. Ballot Measure 47 would also prohibit, without a vote of the
people, alternate local financing of government services or products paid
in part or whole historically by property taxes. Ballot Measure 47 would
also require a majority vote and 50 percent voter turnout to pass new
property tax measures on any date other than a general election. The State
Legislative fiscal office estimates revenue losses to local governments
from Ballot Measure 47 at $472 million in 1997-98, $560 million in 1998-99,
and increasing thereafter. This reduction in local government revenues
could have a significant impact on the ability of local governments to
service their outstanding debt.

Ballot Measure 46 would require the vote of a majority of registered
voters to pass revenue measures; the current system requires only a
majority of those voting in an election to pass revenue measures. The new
requirement would apply to all proposed tax increases, including property
tax operating levies and levies for general obligation bond issues. If
adopted, Ballot Measure 46 would make the passage of taxation measures much
more difficult, and would most likely lead to fewer tax supported debt and
operating levies.

The impact of other ballot measures is more indirect, with some ballot
measures projected by the State to result in net savings for the State and
its municipal institutions, and others projected to require additional
expenditures. The approval by voters of these ballot measures could cause a
reduction in the ratings for debt obligations issued by the State and its
political subdivisions, as well as by Oregon municipalities. Rating
changes, if any, may also depend upon the specific impact of the individual
ballot measure or measures on the revenues of the issuer and the effect of
the ballot measures on the revenues utilized to pay the debt service of the
rated indebtedness.

Fiscal Matters. The State Department of Administrative Services
expects some slowing in Oregon's economy due in part to a shortage of
skilled labor and some decrease in the growth rate of the construction
sector. The Department projects job growth to be 4.1 percent in 1996 and
2.4 percent in 1997. The Department projects that net in-migration should
provide some additional skilled workers, but movement to Oregon from other
states is likely to be limited by higher home prices in Oregon and a
continuing economic recovery in California. The Department projects that
expansion of the semiconductor industry will remain the driving force
behind Oregon's economic growth. Strong export activity, broad base service
sector growth and growth in electronic jobs and overall high technology
manufacturing jobs should, according to the Department, also contribute to
Oregon economic growth. The Department expects that income, population and
employment growth will exceed the national average for the eight-year
period between 1995 and 2003.

The Department of Administrative Services reports that Oregon wage and
salary employment for the first quarter of 1996 increased at an annual rate
of 4.8 percent, and projects an increase of 7.8 percent in 1996, down from
an estimated 8.1 in 1995. The Department estimates that personal income
increased 7.6 percent in 1995 and projects an increase of 6.9 percent in
1996.

The Oregon Constitution requires that the State budget be balanced
during each fiscal biennium. Should the State experience budgetary
difficulties similar to the effects of the national recession on Oregon
during the first half of the 1980's, the State, its agencies, local units
of government, schools and private organizations which depend on State
revenues and appropriations for both operating funds and debt service could
be required to expand revenue sources or curtail certain services or
operations in order to meet payments on their obligations. To the extent
any difficulties in making payments are perceived, the market value and
marketability of outstanding debt obligations in the Oregon Trust, the
asset value of the Oregon Trust and interest income to the Oregon Trust
could be adversely affected.

The budget for the 1995-97 biennium includes a General Fund budget of
$7.375 billion, representing an increase of 15.3% over 1993-95
expenditures. Total appropriations for all funds in the 1995-97 budget are

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$22.262 billion, representing an increase of 8.6% over the 1993-95
expenditures. This total includes, in addition to the General Fund, $10.917
billion in Other Funds and $3.970 billion in Federal Funds.

The obligation of the State under Ballot Measure No. 5 to replace most
of the lost revenues of school districts has had an adverse effect on the
State's General Fund. These replacement dollars are estimated by the State
Legislative Revenue Office to total $461.0 million during the 1991-93
fiscal biennium, $1.499 billion during the 1993-95 biennium, and $1.309
billion during the 1995-96 fiscal year. Under Ballot Measure No. 5, the
State's obligation to replace school revenues terminates after fiscal year
1995-96.

Debt Obligations. The State of Oregon issued $658.1 million in bonds,
notes and certificates of participation ("COPs") during the fiscal year
ended June 30, 1996, an increase of 49.3% from the $440.8 million in bonds,
notes and COPs issued in the fiscal year ended June 30, 1995. Of the fiscal
year 1995-96 total, $174.6 million were general obligations, $213.6 million
were revenue obligations, and $269.9 million were COPs. During the fiscal
year ended June 30, 1996, local Oregon governments issued approximately
$1.051 billion in debt, a decrease of approximately 20.2% from the fiscal
year ended June 30, 1995 issuances of $1.317 billion.

The State of Oregon had outstanding $3.697 billion in general
obligations at June 30, 1996 representing a decrease of 12.7% from the
total outstanding of $4.235 billion at June 30, 1995. Oregon local
governments had $7.302 billion in total debt outstanding at June 30, 1995,
representing an increase of 8.7% from the total outstanding of $6.718
billion at June 30, 1995.

At June 30, 1996, the State of Oregon had outstanding approximately
$2.837 billion of Oregon Veterans' Welfare Bonds and Notes, representing a
decrease of 14.9% from the total outstanding of $3.333 billion at June 30,
1995. The Veterans' Welfare Bonds and Notes, which are utilized to finance
the veterans' mortgage loan program, are administered by the Oregon
Department of Veterans' Affairs, and are general obligations of the State
of Oregon.

General obligation bonds of the State of Oregon are currently rated Aa
by Moody's and AA- by Standard & Poor's.

Taxes and Other Revenues. The State relies heavily on the personal
income tax. The personal income tax generated $5.381 billion of the total
1993-95 biennium General Fund revenues of $6.536 billion. The State's
Department of Revenue estimates that the personal income tax will generate
$6.024 billion of the total General Fund revenues of $7.127 billion
projected for the 1995-97 biennium. The State corporate income and excise
tax generated $575.8 million in revenues during the 1993-95 biennium, and
is projected by the Department of Revenue to generate $470.9 million in
revenues during the 1995-97 biennium.

Revenues generated by the State lottery are currently dedicated to
economic development and education. State lottery officials report that
revenues generated from the regular lottery sales for the 1995-96 fiscal
year totaled $344.2 million, with $75.3 million of that amount having been
made available to the State. State lottery officials also report that the
State's video poker program generated revenues of $355.7 million during the
1995-96 fiscal year, with $202.7 million of that amount being made
available to the State. State lottery officials currently forecast $354.4
million from regular lottery sales and $340.6 million from video poker
sales for the 1996-97 fiscal year, with $80.0 million and $187.3 million of
those amounts, respectively, projected to be available to the State. State
lottery officials project that revenues for the 1995-1997 biennium from
regular lottery sales will be $698.6 million and from video poker sales
will be $696.3 million, with $155.3 million and $390.1 million of those
amounts, respectively, projected to be available to the State. State
Lottery officials expect video poker revenues to remain uncertain due to
increasing competition from tribal gambling casinos.

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Under existing state tax programs, if the actual corporate income and
excise taxes received by the State in a fiscal biennium exceed by two
percent or more the amount estimated to be received from such taxes for the
biennium, the excess must be refunded as a credit to corporate income and
excise taxpayers in a method prescribed by statute. Similarly, if General
Fund revenue sources (other than corporate income and excise taxes)
received in the biennium exceed by two percent or more the amount estimated
to be received from such sources during the biennium, the excess must be
refunded as a credit to personal income taxpayers.

Authority to levy property taxes is presently vested with the
governing body of each local government unit. In addition to the
restrictions of Ballot Measure No. 5, other constitutional and statutory
provisions exist which limit the amount that a governing body may levy:

1. Levy Within 6 Percent Limitation (Tax Base Levy). A tax base,
approved by a majority of voters at a statewide general or primary
election, represents permanent authority to annually levy a dollar amount
which cannot exceed the highest amount levied in the three most recent
years in which a levy was made, PLUS six percent thereof. A local unit is
permitted to have but one tax base levy and proceeds may be used for any
purpose for which the unit may lawfully expend funds.

2. Levy Outside 6 Percent Limitation (Special, Serial or Continuing
Levy). Special and serial levies are temporary taxing authorities
permitting the levy of a specific dollar amount for one year (Special) or
for two or more years up to ten years (Serial). Continuing levies are those
approved by voters prior to 1953, are permanent in nature and are limited
in amount by the product of the voted tax rate and the assessed value of
the unit. Since 1978 Serial levies may also be established based on a
specified tax rate but the term may not exceed three years. Not more than
four serial levy measures may be proposed in a given year.

3. Levy Not Subject to 6 Percent Limitation (Debt Levy). Local units
are required to annually levy an amount sufficient to pay principal and
interest costs for a bonded debt. Bond measures to be paid from future tax
levies must first be approved by a majority of those voting unless
otherwise provided by law.

Responding to a number of school closures occurring as a result of tax
levy failures during the last decade, Oregon voters approved a school
"safety Net" measure in 1987 designed to prevent future closures and
maintain schools at the standards required by the State. The law provides
that in the event a school district levy is defeated, upon making a finding
that schools may close for lack of funds, the school board is authorized to
levy property taxes no greater than the amount levied in the prior year and
to adjust the district budget accordingly for the period through the next
date set to vote on the levy.

Litigation. The following summary of litigation relates only to
matters as to which the State of Oregon is a party and as to which the
State of Oregon has indicated that the individual claims against the State
exceed $5 million. Other litigation may exist with respect to individual
municipal issuers as to which the State of Oregon is not a party, but
which, if decided adversely, could have a materially adverse effect on the
financial condition of the individual municipal issuer.

1. SAIF Fund Transfers. During 1983, three special sessions of the
Legislature were convened to balance the previously approved budget for the
1981-83 fiscal biennium. Among the actions required to balance the budget
were the reduction of expenditures during the biennium by more than $215
million and the transfer to the State's General Fund in June 1983 of $81
million from the surplus of the State Accident Insurance Fund ("SAIF") that
were held in SAIF's Industrial Accident Fund. The State was sued in
litigation challenging the legality of the transfer of this surplus from
SAIF's Industrial Accident Fund to the General Fund. The Oregon Supreme
Court held that the transfer of the $81 million was not proper. The Court
did not, however, require that the funds be repaid to SAIF, nor did the
Court award the plaintiff any damages.

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As a result of the decision, a coalition of Oregon businesses filed
companion class action lawsuits in 1988 against the State seeking the
return of the entire $81 million, plus interest accrued. The lawsuit
alleged that 30,000 Oregon businesses were denied potential dividend
payments when the Legislature improperly transferred the SAIF reserves to
the General Fund.

After a series of appeals, on November 19, 1993, the Oregon Supreme
Court ruled that the State should return to SAIF the $81 million that the
Legislature transferred to the General Fund. The Oregon Supreme Court
remanded the case to the trial court to fashion a decree based upon
evidence of what SAIF would have done with the money if it had not been
transferred to the General Fund. On remand, the trial court ordered the
State to return the $81 million to SAIF, with interest at the rate
Industrial Accident Fund investments have earned since July 1, 1982. In its
1995 session, the Legislative Assembly appropriated $60 million to the
Industrial Accident Fund. To date, the State has repaid $65 million of the
$81 million principal amount, but has not yet paid any of the interest
obligation.

The parties drafted a settlement agreement, which the trial court
approved on February 26, 1996. Under the agreement, the State is obligated
to pay a total of $225 million to the Industrial Accident Fund. Of that
amount, $65 million has already been paid, $80 million must be paid at the
end of the 1997 legislative session, and an additional $80 million must be
paid at the end of the 1999 legislative session. If the State Legislature
fails to appropriate the required amounts, the State will be in breach of
the agreement and subject to additional court action from the plaintiffs.

2. Spotted Owl Timber Sale Cases. The State is currently facing
potential claims in connection with twenty-two State timber sales involving
timber lands that spotted owls may be using as habitats. Although only a
few suits have been brought against the State at this time, the State
anticipates that other similar cases will be filed. While the State has
indicated that it is not now possible to estimate the probable outcome of
these claims, it estimates that the total potential exposure to the State
exceeds $11.6 million.

3. State Employee Claims for Overtime Pay. Two cases have been brought
on behalf of state employees who had been deemed exempt from the federal
Fair Labor Standards Act overtime provisions. In the first case, plaintiffs
sought class status for state employees who claim that they are not
salaried employees exempt from the federal Fair Labor Standards Act
overtime provisions. In November 1995, judgment was entered in this case
against the State in the amount of $705,802, plus $84,801 in prejudgment
interest. In the second case, filed on behalf of all state management
service employees, plaintiffs claim that employees who are subject to
disciplinary pay reduction are entitled to payment for overtime. The
plaintiff class consists of approximately 50 individuals. The State
estimates that the amount of damages the plaintiff class could recover
equals approximately $1.5 to $2 million plus attorneys' fees. Based upon a
recent decision by the United States Supreme Court that expands the scope
of Eleventh Amendment immunity of states from suits in federal court, the
State has asked the United States Court of Appeals for the Ninth Circuit to
remand one of these cases for entry of a judgment dismissing the action for
lack of subject matter jurisdiction and anticipates filing a similar motion
in the second case. The State anticipates the Court of Appeals will grant
its motion and plaintiffs will refile their cases in state court.

4. Taxation of Federal Retiree Pension Benefits. Several cases have
been filed in the Oregon Tax Court and the Oregon Circuit Courts alleging
that a 1991 increase in the Public Employees' Retirement System ("PERS")
benefits, to offset State taxation of the PERS benefits, violates a holding
by the United States Supreme Court in Davis v. Michigan Dept. of Treasury.
The Davis case holds that state statutes may not provide disparate tax
treatment of state and federal pension benefits. The Oregon Supreme Court
upheld a ruling by the Oregon Tax Court in Ragsdale v. Dept. of Revenue
that the increase in PERS benefits did not violate the Davis holding, and
is constitutional; the United States Supreme Court has denied review of
this case.

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Suits involving the same plaintiffs and issues have also been filed in the
state circuit court and in the tax court on behalf of a group of federal
retirees seeking refunds of taxes paid to the State. The case has been
stayed in circuit court and is being litigated in the tax court. In 1995,
the Oregon Legislature enacted House Bill 3349 ("HB 3349"), which provides
a remedy to PERS beneficiaries. The federal retirees are also challenging
the provisions of HB 3349. The State has indicated that it is not possible
to estimate the potential impact of liability under any of the PERS cases
at this time.

An additional case challenging the PERS benefit increase on the same
grounds that the court ruled against in the Ragsdale case, and seeking to
invalidate HB 3349, was filed in Multnomah County. The court ruled in favor
of the State, but plaintiffs are seeking clarification and reconsideration
of the judge's ruling.

5. Taxation of State Retiree Benefits. Class action certification has
been granted in an action filed against the State and other public entities
regarding the taxation of Oregon public employment retirement benefits. The
defendant class is composed of all employers participating in PERS. The
plaintiffs seek enforcement of the Oregon Supreme Court's decision in
Hughes v. State of Oregon. In Hughes, the Court ruled that a statutory
amendment repealing a tax exemption for retirement benefits violated the
constitutional provision against impairment of contract for benefits
received from work performed prior to the date of amendment. The Court in
Hughes deferred to the Oregon Legislature to fashion a remedy; the Oregon
Legislature failed to fashion a remedy, however, in its 1993 session.
Plaintiffs filed this action, therefore, to seek to require public
employers to pay breach of contract damages or to increase benefits due to
taxation of previously untaxed pensions.

The 1995 Oregon Legislature enacted HB 3349, which provides a remedy
to PERS beneficiaries by granting PERS members increased benefits as
compensation for damages resulting from the taxation of the PERS benefits.
The bill also prohibits any class action suit for damages based upon such
taxation and, according to the State, effectively renders the claims of the
PERS beneficiaries moot. The fiscal impact statement submitted with this
bill indicated that State agencies will be obligated to pay increased
employer contributions of approximately $27 million in the 1995-97 biennium
and approximately $36 million in the 1997-99 biennium to fund the benefits
increase.

Local governments have asserted defenses that they should not be
required to provide funds for the remedy provided in HB 3349 based upon
breach of contract theories, and are seeking indemnification from the State
for any amounts they must pay toward a remedy. The passage of HB 3349 does
not moot the claims of local governments. If the local governments are
successful, liability would be imposed directly on the General Fund for the
amount of increased benefits that the local governments must pay as a
result of HB 3349. According to the State, the amount of liability imposed
on the State as a result of the local governments' claims is uncertain. The
trial court has ruled in favor of local governments on the breach of
contract issues.

In November 1995, the Circuit Court ruled on the State's motions for
reconsideration of the Court's earlier ruling with respect to the local
governments' claims and on HB 3349. The Court upheld its ruling with
respect to local governments. The Court also found that the effect of HB
3349 was to require local governments to pay breach of contract damages in
violation of the Court's prior ruling, because the local governments would
be required to pay increased contribution amounts to fund the remedy
provided in HB 3349. In addition, because the source of funds for the
increased benefit payments was an integral part of HB 3349, and could not
be severed from the rest of the bill, the Court held that HB 3349 was void
in its entirety. The Court enjoined the payment of increased benefits,
scheduled to begin in January 1996, to PERS retirees under HB 3349. The
State has appealed the Circuit Court's ruling.

6. Out-of-State Insurance Company Claims. In August 1993, several
out-of-state insurance companies filed a lawsuit against the State
challenging the State's gross premium tax on out-of-state insurers. The
lawsuit alleges that the tax violates the Equal Protection Clause of the
14th Amendment to the United States

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Constitution because the tax treats domestic and "foreign" insurers
differently. The insurance companies seek a declaration that the Oregon
gross premium tax is unconstitutional, refunds of all premiums paid from
1982 to date, and the recovery of their attorney's fees. According to the
State, if claims were brought by all affected foreign insurers, the State's
possible refund liability exposure could exceed $30 million. In hearings
before the 1993 Oregon Legislative Assembly concerning the gross premium
tax laws, the estimates of the State's potential refund liability in such a
case ranged from $27.4 million to $174.6 million.

The 1995 Oregon Legislative Assembly passed House Bill 2855 ("HB
2855") which equalizes the taxation of foreign and domestic insurers. Most
insurance companies have dismissed their cases due to the passage of HB
2855. One insurance company, however, has not dropped its counterclaim on
the equal protection issue. If this case proceeds to trial and succeeds, it
could open the door to recovery by other insurers who are not a party to
the present action and have not allowed the case to be dismissed against
them with prejudice. If such insurers do bring cases, the State could be
subject to potential refund liability of several million dollars per year
for each year that must be refunded. In February 1996, the court ruled on
cross motions for summary judgment. The court ruled in favor of the State
on all issues except the years for which a retaliatory tax could be
imposed, with the result that the State will be unable to collect
approximately $750,000. No judgment has been entered in the case. The
parties are pursuing settlement negotiations to arrive at a consent decree.

7. Liability for PERS Losses. Four separate plaintiffs have filed
lawsuits against the State seeking reimbursement on behalf of the Public
Employees' Retirement Fund (the "Fund") for losses in excess of $5 million
allegedly suffered by the Fund as a result of investment actions taken by
former Oregon State Treasury employees. The plaintiffs seek recovery of the
losses from the issuers of certain fidelity bonds or, in the alternative, a
transfer from the State's general fund to the Fund of any losses that are
not recoverable under the fidelity bonds. The State has now recovered on
the fidelity bond an amount that offsets part of the losses to the Fund.
According to the State, plaintiffs' claims that are based upon recovery
under the bond are now moot. The remaining claims were dismissed by the
trial court. In February 1995 the Oregon Court of Appeals upheld the trial
court's decision. The Oregon Supreme Court has granted review of the case
on several issues. Upon reconsideration, however, the Oregon Supreme Court
dismissed the review as improvidently granted. The Court of Appeals ruling
that affirmed the trial court's dismissal of the case, therefore, stands as
the final resolution of these cases.

8. Challenge to Oregon Health Plan. A class action suit has been filed
in federal court seeking to add certain Medicare beneficiaries, consisting
of disabled and elderly persons, to the group of persons covered under the
Oregon Health Plan (the "Plan"). The plaintiff class is seeking additional
services offered under the Plan which they do not receive under the Federal
Medicare program. If plaintiffs are successful, the State estimates that
costs under the Plan would increase an additional $30 million per biennium.
The Court has ruled in favor of the State on its motion for summary
judgment and dismissed the case. The plaintiffs have filed an appeal of the
court's ruling with the United States Court of Appeals for the Ninth
Circuit.

9. Liability for Radiation Experiments. A class action suit has been
filed in federal court on behalf of inmates and their families for injuries
sustained by inmates in radiation experiments in the 1960s and 1970s. The
former head of the medical services for the Oregon State Police has been
named as a defendant. Plaintiffs seek $250 million in damages. Although the
State believes it is too early to determine the actual amount plaintiffs
are likely to recover, the State believes it is unlikely they will recover
the full amount sought. According to the State, the State intends to assert
defenses based on statute of limitation and ultimate repose.

PENNSYLVANIA

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RISK FACTORS--Potential purchasers of Units of the Pennsylvania Trust
should consider the fact that the Trust's portfolio consists primarily of
securities issued by the Commonwealth of Pennsylvania (the "Commonwealth"),
its municipalities and authorities and should realize the substantial risks
associated with an investment in such securities. Although the General Fund
of the Commonwealth (the principal operating fund of the Commonwealth)
experienced deficits in fiscal 1990 and 1991, tax increases and spending
decreases have resulted in surpluses the last four years; as of June 30,
1996, the General Fund had a surplus of $635.2 million.

Pennsylvania's economy historically has been dependent upon heavy
industry, but has diversified recently into various services, particularly
into medical and health services, education and financial services.
Agricultural industries continue to be an important part of the economy,
including not only the production of diversified food and livestock
products, but substantial economic activity in agribusiness and food-
related industries. Service industries currently employ the greatest share
of nonagricultural workers, followed by the categories of trade and
manufacturing. Future economic difficulties in any of these industries
could have an adverse impact on the finances of the Commonwealth or its
municipalities and could adversely affect the market value of the Bonds in
the Pennsylvania Trust or the ability of the respective obligors to make
payments of interest and principal due on such Bonds.

Certain litigation is pending against the Commonwealth that could adversely
affect the ability of the Commonwealth to pay debt service on its
obligations including suit relating to the following matters: (i) the ACLU
has filed suit in federal court demanding additional funding for child
welfare services; the Commonwealth settled a similar suit in the
Commonwealth Court of Pennsylvania and is seeking the dismissal of the
federal suit, inter alia because of that settlement; after its earlier
denial of class certification was reversed by the Third Circuit Court of
Appeals, the district court granted class certification to the ACLU, and
the parties are proceeding with discovery (no available estimate of
potential liability); (ii) in 1987, the Supreme Court of Pennsylvania held
the statutory scheme for county funding of the judicial system to be in
conflict with the constitution of the Commonwealth, but stayed judgment
pending enactment by the legislature of funding consistent with the
opinion; a special master appointed by the Court submitted an
implementation plan in 1997, recommending a four phase transition to state
funding of a unified judicial system; the special master recommended that
the implementation of the phase should be effective July 1, 1998, with the
completion of the final phase early next century; objections to the Special
Master's report were due by September 1, 1997; the General Assembly has yet
to consider legislation implementing the Court's judgment; (iii) litigation
has been filed in both state and federal court by an association of rural
and small schools and several individual school districts and parents
challenging the constitutionality of the Commonwealth's system for funding
local school districts--the federal case has been stayed pending the
resolution of the state case; the state trial, post-trial briefing and oral
arguments have been completed, and the judge has taken the case under
advisement (no available estimate of potential liability); (iv)
Envirotest/Synterra Partners ("Envirotest") filed suit against the
Commonwealth asserting that it sustained damages in excess of $350 million
as a result of investments it made in reliance on a contract to conduct
emissions testing before the emission testing program was suspended.
Envirotest has entered into a Settlement Agreement to resolve Envirotest's
claims that will pay Envirotest a conditional sum of $195 million over four
years; (v) in litigation brought by the Pennsylvania Human Relations
Commission to remedy unintentional conditions of segregation in the
Philadelphia public schools, the School District of Philadelphia filed a
third-party complaint against the Commonwealth asking the Commonwealth
Court to require the Commonwealth to supply funding necessary for the
District to comply with orders of the court; the Commonwealth Court found
that the School District was entitled to receive an additional $45.1
million for the 1996-97 school year, but the Pennsylvania Supreme Court
vacated this decision in September 1996; pursuant to the Court's orders,
the parties have briefed certain issues, but oral argument has not yet been
scheduled (no available estimate of potential liability); (vi) in February
1997, five residents of the City of Philadelphia, joined by the City, the
School District and others, filed a civil action in the Commonwealth Court
for declaratory judgment against the Commonwealth and certain Commonwealth
officers and officials that the defendants had failed to provide an
adequate quality of education in Philadelphia, as required by the

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Pennsylvania Constitution; after preliminary objections and briefs were
filed, the Court heard oral argument in September 1997, and has taken the
matter under advisement (no available estimate of potential liability);
(vii) in April 1995, the Commonwealth reached a settlement agreement with
Fidelity Bank and certain other banks with respect to the constitutional
validity of the Amended Bank Shares Act and related legislation; although
this settlement agreement did not require expenditure of Commonwealth
funds, the petitions of other banks are currently pending with the
Commonwealth Court (no available estimate of potential liability); and
(viii) suit has been filed in state court against the State Employees'
Retirement Board claiming that the use of gender distinct actuarial factors
to compute benefits received before August 1, 1983 violates the
Pennsylvania Constitution (gender-neutral factors have been used since
August 1, 1983, the date on which the U.S. Supreme Court held in Arizona
Governing Committee v. Norris that the use of such factors violated the
Federal Constitution); in 1996, the Commonwealth Court heard oral argument
en banc, and in 1997 denied the plaintiff's motion for judgement on the
pleadings (no available estimate of potential liability).

Although there can be no assurance that such conditions will continue,
the Commonwealth's general obligation bonds are currently rated AA- by
Standard & Poor's and A1 by Moody's and Philadelphia's general obligation
bonds are currently rated BBB by Standard & Poor's and Baa by Moody's.

The City of Philadelphia (the "City") experienced a series of General
Fund deficits for Fiscal Years 1988 through 1992 and, while its general
financial situation has improved, the City is still seeking a long-term
solution for its economic difficulties. The audited balance of the City's
General Fund as of June 30, 1996 was a surplus of approximately $118.5
million up from approximately $80.5 million as of June 30, 1995.

In recent years an authority of the Commonwealth, the Pennsylvania
Intergovernmental Cooperation Authority ("PICA"), has issued approximately
$1.76 billion of Special Revenue Bonds on behalf of the City to cover
budget shortfalls, to eliminate projected deficits and to fund capital
spending. As one of the conditions of issuing bonds on behalf of the City,
PICA exercises oversight of the City's finances. The City is currently
operating under a five year plan approved by PICA in 1996. PICA's power to
issue further bonds to finance capital projects expired on December 31,
1994. PICA's power to issue bonds to finance cash flow deficits expired on
December 31, 1996, but its authority to refund outstanding debt is
unrestricted. PICA had approximately $1.1 billion in special revenue bonds
outstanding as of June 30, 1997.

THE TENNESSEE TRUST

RISK FACTORS--In 1978, the voters of the State of Tennessee approved
an amendment to the State Constitution requiring that (1) the total
expenditures of the State for any fiscal year shall not exceed the State's
revenues and reserves, including the proceeds of debt obligations issued to
finance capital expenditures and (2) in no year shall the rate of growth of
appropriations from State tax revenues exceed the estimated rate of growth
of the State's economy. That amendment also provided that no debt
obligation may be authorized for the current operation of any State service
or program unless repaid within the fiscal year of issuance. The State's
fiscal year runs from July 1 through June 30.

In response to public demand for better public education throughout
the State, the 1992 Tennessee General Assembly temporarily raised the State
sales tax by one-half of one percent to 6%, effective April 1, 1992. This
increase became permanent as a result of the 1993 legislative session.
Although the issue of instituting a new State income tax scheme remains a
matter of discussion amongst legislators, most political observers in
Tennessee doubt such a proposal will be passed within the next two-three
years.

The Tennessee economy generally tends to rise and fall in a roughly
parallel manner with the U.S. economy. Like the U.S. economy, the Tennessee
economy entered recession in the last half of 1990 which continued
throughout 1991 and into 1992 as the Tennessee indexes of coincident and
leading economic

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indicators trended downward throughout the period. However, the Tennessee
economy gained strength during the latter part of 1992 and this renewed
vitality steadily continued through 1993, 1994 and into 1995. During the
latter half of 1995 and throughout calendar year 1996, the State's economy
generally became inconsistent in its performance. However, many experts
believe that the State will achieve modest economic gains for fiscal year
ending June 30, 1997.

The Tennessee index of coincident economic indicators, which gauges
current economic conditions throughout the State, has steadily risen each
quarter beginning the third calendar quarter of 1991 except for the second
quarter of calendar year 1996 where the coincident index declined slightly.
For calendar year 1994 the coincident index rose approximately 6.20% over
1993 figures, while 1993 figures increased approximately 4.27% over 1992
figures, and 1992 figures showed a 2.45% increase over the previous year's
figures. In 1995, figures for the coincident index showed a 2.97% increase
over 1994 figures. In 1996, figures for the coincident index were up 2.18%
over 1995 annual figures. No monthly figures for the coincident index are
currently available for 1997.

Tennessee taxable sales were approximately $44.16 billion in 1991,
approximately $46.96 billion in 1992, approximately $50.64 billion in 1993,
approximately $55.32 billion in 1994, approximately $59.65 billion in 1995
and approximately $63.01 billion in 1996, representing percentage increases
of 1.4%, 6.4%, 7.8%, 9.3%, 7.8%, and 5.6%, respectively, over the previous
year's total. No Tennessee taxable sales figures are presently confirmed
for 1997.

Current data indicate that seasonally-adjusted personal income in
Tennessee has grown approximately $5.34 billion from calendar year 1992
averages to calendar year 1993 averages, representing an approximate 5.90%
increase. Seasonably-adjusted personal income grew approximately $6.89
billion from calendar year 1993 averages to calendar year 1994 averages,
representing an approximate 7.03% increase, and grew approximately $6.46
billion from calendar year 1994 averages to calendar year 1995 averages,
representing an approximate 6.42% increase. Comparative figures for
calendar year 1996 versus calendar year 1995 are not yet available.

From 1983 to 1993 Tennessee's per capita income increased
approximately 87.1% to $18,434, compared to the national per capita income
of $20,817 which translates into a ten-year increase of approximately
70.3%. In 1995, the year for which the most current data is available, per
capita income in Tennessee registered $21,038 which equaled approximately
90.6% of the national level. For the fiscal year ended June 30, 1996,
however, Tennessee remained the leading state in the nation in household
bankruptcy filings (1 in every 45 households) with a rate more than twice
the national average (1 in every 93 households).

Tennessee's unemployment rate stood at 4.0% for December 1994, the
lowest figure since the 1980's. The unemployment rate has slowly risen over
the December 1994 low. At the end of calendar year 1995, the State's
unemployment rate stood at 5.2% with the national rate at 5.6% and at
December 1996 the state's unemployment rate had declined slightly to 5.0%
with the national rate at 5.3%. There currently is no unemployment data
for 1997. For the four-year period beginning 1991 and ending 1994, average
annual unemployment in Tennessee steadily decreased, from 6.6% in 1991, to
6.4% in 1992, to 5.7% in 1993 to 4.8% in 1994. However, in 1995 the average
annual Tennessee unemployment rate rose to 5.2% but has since declined
again to 4.9% for calendar year 1996. The Tennessee Department of
Employment Security has projected minimum growth of approximately 23% in
Tennessee's total employment by the year 2005, with an increase of
approximately 600,000-700,000 new jobs. These projections for Tennessee
compare favorably to the projections for national employment growth of
20.5% over the same period.

Historically, the Tennessee economy has been characterized by a
slightly greater concentration in manufacturing employment than the U.S. as
a whole. The Tennessee economy, however, has been undergoing a structural
change in the last 20-25 years through increases in service sector and
trade sector employment and

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manufacturing employment in Tennessee has steadily declined on a percentage
of work force basis. Service sector employment in Tennessee has climbed
steadily since 1973, increasing its share of overall State non-agricultural
employment from 14.5% to 24.7% in 1993. Over the same period, employment in
manufacturing has declined from 33.9% to 22.7%, and employment in the trade
sector has increased in the period from 1973 to 1993 from 20.4% to 23.0% of
non-agricultural employment. Recently, overall Tennessee non-agricultural
employment has grown in the period from 1991 to 1996 from approximately
2.18 million persons to approximately 2.60 million persons, representing
percentage increases of approximately 2.8%, 3.7%, 4.0%, 3.3% and 4.0% for
1992, 1993, 1994, 1995 and 1996, respectively, over the previous year's
figure. Accordingly, non-agricultural employment in Tennessee is relatively
uniformly diversified today with approximately 23% in the manufacturing
sector, approximately 25% in each of the trade and service sectors and
approximately 15% in government. No data is currently available for 1997
non-agricultural employment figures.

Manufacturing employment is one component of non-agricultural
employment. Tennessee manufacturing employment averaged approximately
503,000 persons in 1991; 515,000 persons in 1992; 529,000 persons in 1993,
539,000 persons in 1994, 543,000 persons in 1995, and 531,000 persons in
1996. Comparatively, these figures represent the following percentage
changes from the previous year's figures: approximately 2.4% (1992 vs.
1991), 2.7% (1993 vs. 1992), 1.9% (1994 vs. 1993), 6.5% (1995 vs. 1994) and
- -2.28% (1996 vs. 1995). No manufacturing employment figures are currently
available for 1997.

The Tennessee index of leading economic indicators acts as a signal of
the health of the State's economy four to nine months ahead. In 1994,
figures for the leading index rose approximately 2.40% over 1993 figures,
while 1993 figures were up approximately 1.38% over 1992 figures. In 1995,
figures for the leading index rose a very small .02% over 1994 numbers. In
this most recent year, the 1996 leading index average showed an increase of
.84% over the 1995 leading index average.

Tennessee Department of Revenue collections for calendar year 1995
increased to approximately $5.91 billion, an increase of approximately $410
million, or 6.84% over 1994 figures. Calendar year 1996 figures are
unconfirmed at the time of this publication. The State's rainy-day fund
remained constant from December 1994 to December 1996 at approximately $101
million.

Tennessee's population increased approximately 6.2% from 1980 to 1990,
less than the national increase of 10.2% for the same period. As of July 1,
1996, the State's population was estimated at approximately 5.4 million. A
U.S. census study projects that Tennessee will be the fifth most popular
destination for new residents coming from other states during the period
from 1990-2020. Population growth in Tennessee is expected to come mostly
in the major metropolitan areas (Memphis, Nashville, Knoxville and
Chattanooga) over the next 10-15 years. The overall state population is
expected to grow 5.5% between 1990 and 2000, then 4.6% for the period
between 2000 and 2010. Greatest growth is expected to occur in the
Nashville MSA, which, in 1995, and for the first time, passed the Memphis
MSA as the largest metropolitan population center in Tennessee. The largest
population decline is expected in the rural counties of northwest
Tennessee.

Tennessee's general obligation bonds are rated Aaa by Moody's and AA+
by Standard & Poor's. Tennessee's smallest counties have Moody's lower
ratings ranging from Baa to B, in part due to these rural counties' limited
economies that make them vulnerable to economic downturns. Tennessee's four
largest counties (Shelby, Davidson, Knox and Hamilton) have the second
highest of Moody's nine investment grades, Aa. There can be no assurance
that the economic conditions on which these ratings. are based will
continue or that particular obligations contained in the Portfolio of the
Tennessee Trust may not be adversely affected by changes in economic or
political conditions.

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The Sponsors believe that the information summarized above describes some
of the more significant information regarding the Tennessee economy and
relating to the Tennessee Trust. For a discussion of the particular risks
with each of the Debt Obligations, and other factors to be considered in
connection therewith, reference should be made to the Official Statements
and other offering materials relating to each of the Debt Obligations
included in the portfolio of the Tennessee Trust. The foregoing information
regarding the State does not purport to be a complete description of the
matters covered and is based solely upon information provided by State
agencies, publicly available documents and news reports of statements by
State officials and employees. The Sponsors and their counsel have not
independently verified this information, however, the Sponsors have no
reason to believe that such information is incorrect in any material
respect. None of the information presented in this summary is relevant to
Puerto Rico or Guam Debt Obligations which may be included in the Tennessee
Trust.

TENNESSEE TAXES

In the opinion of Hunton & Williams, Knoxville, Tennessee, special
counsel on Tennessee tax matters, under existing Tennessee law and assuming
that (i) the Tennessee Trust is a grantor trust under the grantor trust
rules of Sections 671-677 of the Code and (ii) not less than 75% of the
value of the investments of the Tennessee Trust are in any combination of
bonds of the United States, State of Tennessee, or any county or any
municipality or political subdivision of the State, including any agency,
board, authority or commission of the State or its subdivisions:

1. The Tennessee Trust will not be subject to the Tennessee individual
income tax, also known as the Hall Income Tax; the Tennessee corporate
income tax, also known as the Tennessee Excise Tax, or the Tennessee
Franchise Tax.

2. Tennessee Code Annotated

Section 67-2-104(q) specifically exempts from the Hall Income Tax
distributions from the Tennessee Trust to Holders of Units to the extent
such distributions represent interest on bonds or securities of the United
States government or any agency or instrumentality thereof or on bonds of
the State of Tennessee, or any county, municipality or political
subdivision thereof, including any agency, board, authority or commission.
The Tennessee Department of Revenue has taken the administrative position
that distributions attributable to interest on obligations issued by Puerto
Rico and Guam are exempt from the Hall Income Tax.

3. The Tennessee Trust will not be subject to any intangible personal
property tax in Tennessee on any Debt Obligation in the Tennessee Trust.
The Units of the Tennessee Trust also will not be subject to any intangible
personal property tax in Tennessee but may be subject to Tennessee estate
and inheritance taxes.

Holders of Units should consult their own tax advisor as to the tax
consequences to them of an investment in and distributions from the
Tennessee Trust.

TEXAS

RISK FACTORS--The State Economy. Over the last decade, the Texas
economy has become more like the national economy, and, as it has done so,
the nature of the Texas work force has also changed. The Texas economy has
become more concentrated in the service and trade industries, with over
half of the Texans working in non-farm jobs being employed in those
industries. Texas has, however, added many new jobs in "high-tech"
industries over the past years, with employment in that segment growing by
approximately

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319,000 jobs from 1983 to 1993. Any major downturns in this industry would
likely hamper further economic growth in Texas in the near future.

As a consequence of the changes in the Texas economy, it has become
more vulnerable to changes in the value of the dollar and the federal
budget deficit. Exports of goods and services to Central and South America,
as well as elsewhere in the world, are becoming an increasingly important
factor in the Texas economy. As is shown by the effect of the economic
crisis in Mexico in the mid-1990's, international economic events and trade
policies now have a heightened effect on the economic activity in Texas. In
March, 1995 state government officials estimated that as much as one-half
of a percentage point in the growth of the Texas economy forecasted for
1996-1997 fiscal biennium by the state Comptroller of Public Accounts could
be lost as a result of the fiscal crisis in Mexico that has occurred over
the past few years. That estimate was made based on an anticipated decrease
in exports to Mexico as well as a slowdown in retail trade and economic
activities in the important region along the Texas-Mexico border. Trade
with Mexico was estimated in March 1995 to support directly and indirectly
more than 464,000 jobs in Texas, about 6% of the total Texas employment.
Texas exports to Mexico in 1995, in fact, are estimated to have dropped to
$21.9 billion, a decrease of $2 billion from the level of exports to Mexico
in 1994. Retail sales and trade in the border region was also adversely
affected. In response to improvement in the Mexican economy after the
crisis in the mid-1990's, Texas' exports to Mexico rebounded to $27.4
billion in 1996. Any future economic problems that Mexico encounters in
the future could result in reductions of Texas' exports to Mexico and cross-
border trade with Mexico, as well as increased unemployment, less growth in
the Texas gross state product and reduced tax revenue for the state.

The economic difficulties in Asia during late 1997 and early 1998 may
have an adverse impact on the Texas economy as Japan, Singapore, South
Korea and Taiwan have recently been among the top ten destinations for
Texas exports.

The federal Base Closure and Realignment Commission has made decisions
in the recent past that may affect certain regions in Texas significantly.
Most notably, Kelly Air Force Base in San Antonio, Texas, is slated for
closure over the next several years with the resulting direct job loss now
estimated to be between 10,000 and 18,000 jobs. Local officials in San
Antonio have asserted that loss of those jobs would increase unemployment
in the significant Hispanic population of metropolitan San Antonio by 73%.
In addition, three other metropolitan areas in Texas may be affected by the
actions of the commission. State officials and members of the Texas
Congressional delegation have been working to reduce the adverse effect of
the Commission's actions, both through attempts to save jobs and by
otherwise reducing community dependence on defense establishments. There is
no way to predict accurately at this time the effect these closures may
ultimately have on the Texas economy generally and economy of the San
Antonio metropolitan region in particular.

The state government of Texas still faces significant financial
challenges as demands for state and social services increase and spending
of state funds for certain purposes is mandated by the courts and federal
law and is required by growing social services caseloads. The population of
Texas has grown significantly in the recent past and is estimated now to be
approximately 19 million persons. Illegal immigration into Texas continues
to be problematic for the state, creating additional demand for
governmentally provided social services. In addition, among the ten most
populous states, Texas has had the highest percentage of its population
living below the poverty line, with almost 18% of its populace living below
that line. Some state officials are concerned that Texas' growth pattern
and the number of persons living in poverty in Texas are not and will not
be recognized properly by programs distributing federal funds available for
social assistance programs to the states, resulting in Texas having fewer
funds than a fair allocation of federal funding would otherwise provide to
Texas. As a result, unless funding is appropriately allocated or additional
sources of funding can be found, the growing need for social services will
further strain the limited state and local resources for these programs.

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During Texas' 1997 fiscal year ended August 31, 1997, Texas expended almost
$16.1 billion on health and human services compared with spending on health
and human services of approximately $14.7 billion in fiscal 1996. In
fiscal 1997, Texas received over $12.1 billion in federal funding for all
purposes, which constituted 23.2% of all state revenues for that fiscal
year, as compared with federal funding of $11.78 billion in fiscal 1996,
which was 23.2% of all state revenues in that fiscal year. The percentage
that the total federal funds received by Texas was of Texas' total health
and human services spending decreased by 4.7% from fiscal 1996 to fiscal
1997. Generally, over half of the federal funding received by Texas in any
fiscal year is allocated to health and human services programs provided and
administered by Texas. The welfare reform legislation adopted by the United
States Congress and signed into law by President Clinton in August, 1996,
provides for limits on Aid to Dependent Children benefits, reduces food
stamp benefits and prohibits the provision of food stamps and Supplemental
Security Income to legal immigrants. In addition, certain limits are
imposed on the amount of lifetime benefits that can be paid to any
recipients of welfare benefits. The legislation also provides for block
grants of funds from the federal government and for the states to be able
to fashion programs for the use of those funds. Although the ultimate and
full effect of the federal welfare reform law on Texas' public assistance
programs remains unclear, with its high number of legal immigrants and
dependence of poorer Texans on food stamps rather than other types of
assistance, the law may have a disproportionate effect on Texas' public
assistance programs. Formulas for the allocation of block grant funds have
typically favored states with demographics different from those of Texas
with its rapidly increasing population and high incidence of poverty among
its population. Texas has typically provided low levels of assistance for
the working poor, with the assistance given being centered on the provision
of food stamps to this group. In addition, one estimate has concluded that
in 1995, Texas had a total of 187,000 legal immigrants who were receiving
food stamps and 53,000 who were receiving Supplemental Security Income. If
Texas continues to provide assistance to these groups at current levels of
spending, even with block grants from the federal government, it is
anticipated that such public assistance programs would adversely affect
state finances. The welfare reform initiatives are also expected to result
in additional requirements that Texas provide additional job training to
its residents, while the federal government will provide less aid to
subsidize that job training. The Texas Workforce Commission estimated that
in 1997 Texas would be required to provide work activities for an
additional 29,000 clients (who are public assistance recipients) beyond the
prior federal requirements. Under the welfare reform law, within five
years, Texas must have 50 percent of its welfare recipients working at
least 30 hours per week or lose up to five percent of its federal funds
that are used to fund public assistance programs. Such loss of funds would
be required to be made up out of the state's general revenues. It is
possible that under the federal welfare law, Texas will lose substantial
amounts of federal funding of its public assistance programs, placing even
greater strains on Texas' state and local finances if public assistance is
to continue at current levels. However, it is impossible to predict at this
time what the long term effect of this welfare reform legislation will be
on the Texas economy.

Initial steps have been taken to deregulate the electric power
utilities in Texas. Although the major electric utilities in Texas have not
been deregulated, certain electric power cooperatives have been
deregulated, and it is expected that further deregulation will occur.
Although the deregulation of electric utilities is anticipated to lower the
cost of electricity to consumers ultimately, consumers are expected to bear
a substantial portion of the costs of any transition to a deregulated
industry. Such costs could have a short term adverse effect on the ability
of Texas to attract new businesses to locate in Texas and to create the new
jobs needed to provide work for the growing Texas workforce.

Bond Ratings. The state's credit ratings have been unchanged over
recent periods, although such ratings have caused the state to pay higher
interest rates on state bonds than those historically enjoyed by the state.
Some local governments and other political subdivisions also have had their
credit ratings lowered from their historical levels. As of January 31,
1998, general obligation bonds issued by the State of Texas were rated AA
by Standard & Poor's, Aa by Moody's and AA+ by Fitch's Investor Services.

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State Finances. In its fiscal year ended August 31, 1997, the Texas state
government's total net revenue exceeded its total net expenditures by
approximately $9.1 billion. The 75th Texas Legislature that concluded in
June, 1997 adopted an appropriations bill for the 1998-1999 biennium that
provides for spending of $86.2 billion, including more than $37 billion for
education and $26 billion for health and human services during the
biennium. The State Comptroller of Public Accounts has certified that
sufficient funds will be available for the payment of budgeted
expenditures. While state government officials have based the 1998-1999
biennium budget based on forecasts of revenues to be received in that
period, there is no assurance that revenues in the estimated amounts will
be received by the State of Texas during that period or that the state will
not have a budget deficit for that two-year period. The revenue estimates
on which the 1998-1999 budget is based assume aggregate receipts of almost
$24.6 billion from the federal government during the biennium, which will
be 28.5% of the state's budget for the period. As noted above, changes in
federal law could result in the amounts of federal funding being less than
those assumed by the state government for budgeting purposes.

The two major sources of state revenue are state taxes and federal
funds. Other revenue sources include income from licenses, fees and
permits, interest and investment income, the state lottery, income from
sales of goods and services and land income (which includes income from
oil, gas and other mineral royalties as well as from leases on state
lands). The major sources of state government tax collection are the sales
tax, the sales and rentals taxes on motor vehicles and interstate carriers,
and the franchise tax.

Texas currently has a relatively low state debt burden compared to
other states, ranking thirty-third among all states and ninth among the ten
most populous states in net tax-supported debt per capita, according to
reports published in 1996. However, the debt service of Texas that is
payable from general revenues has grown significantly since 1987. At the
end of Texas' fiscal year 1997, the state debt paid from general revenue
was $3 billion. At that date, the state had an additional $2.45 billion in
tax-supported debt that is considered self-supporting. Total interest
payments on all State of Texas bonds amounted to $553 million during fiscal
1997. Texas has the potential to substantially increase its debt burden,
considering only the bond authorization that was unused in August, 1997. At
August 31, 1997, approximately $721.3 million in bonds payable from general
revenue had been authorized by the state legislature, but not issued. While
Texas law limits the amount of tax-supported debt that Texas may incur to
five percent of average annual general revenue fund revenues, as of August
31, 1997, the outstanding debt-to-limit ratio was only 1.8 percent at that
date. If all authorized bonds had been issued as of that date, the debt-to-
limit ratio would have increased to 2.6 percent. The amount of tax-
supported bonds issued by the State of Texas and its instrumentalities did
not materially increase in fiscal 1997 over 1996, reversing a trend of
significant increases in the amount of long-term tax-supported debt
obligations of the State of Texas over the prior two years. On November 4,
1997, a constitutional amendment that limits the amount of state debt
payable from the general revenue fund was adopted by the voters of Texas.
Under this amendment, the maximum annual debt service in any fiscal year on
state debt payable from the general revenue fund is not permitted to exceed
five percent of an amount equal to the average of the amount of general
revenue fund revenues, excluding revenues constitutionally dedicated for
purposes other than payment of state debt, for the three preceding fiscal
years and the legislature may not authorize additional state debt if the
resulting annual debt service exceeds this limitation.

The State of Texas and all of its political subdivisions and public
agencies, including municipalities, counties, public school districts and
other special districts, had estimated total tax-supported debt of $34.97
billion as of August 31, 1997, including $29.57 billion of local government
debt. In addition, the State of Texas and all of its political subdivisions
and public agencies had an estimated additional $37.28 billion of revenue
debt as of that date including $31.01 billion of local government debt.

Limitations on Bond Issuances and Ad Valorem Taxation. Although Texas
has few debt limits on the incurrence of public debt, certain tax
limitations imposed on counties and cities are in effect debt limitations.
The requirement that counties and cities in Texas provide for the
collection of an annual tax sufficient to retire

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any bonded indebtedness they create operates as a limitation on the amount
of indebtedness which may be incurred as counties and cities may never
incur indebtedness which cannot be satisfied by revenue received from taxes
imposed within the tax limits. The same requirement is generally applicable
to indebtedness of the State of Texas. However, voters have authorized from
time to time, by constitutional amendment, the issuance of general
obligation bonds of the state for various purposes.

The State of Texas cannot itself impose ad valorem taxes. Although the
state franchise tax system does function as an income tax on corporations,
limited liability companies and certain banks, the State of Texas does not
impose an income tax on personal income. Consequently, the state government
must look to sources of revenue other than state ad valorem taxes and
personal income taxes to fund the operations of the state government and to
pay interest and principal on outstanding obligations of the state and its
various agencies.

To the extent the Texas Debt Obligations in the Portfolio are payable,
either in whole or in part, from ad valorem taxes levied on taxable
property, the limitations described below may be applicable. The Texas
Constitution limits the rate of growth of appropriations from tax revenues
not dedicated to a particular purpose by the Constitution during any
biennium to the estimated rate of growth for the Texas economy, unless both
houses of the Texas Legislature, by a majority vote in each, find that an
emergency exists. In addition, the Texas Constitution authorizes cities
having more than 5,000 inhabitants to provide further limitations in their
city charters regarding the amount of ad valorem taxes which can be
assessed. Furthermore, certain provisions of the Texas Constitution provide
for exemptions from ad valorem taxes, of which some are mandatory and
others are available at the option of the particular county, city, town,
school district or other political subdivision of the state. The following
is only a summary of certain laws which may be applicable to an issuer of
the Texas Debt Obligations regarding ad valorem taxation.

Counties and political subdivisions are limited in their issuance of
bonds for certain purposes (including construction, maintenance and
improvement of roads, reservoirs, dams, waterways and irrigation works) to
an amount up to one-fourth of the assessed valuation of real property. No
county, city or town may levy a tax in any one year for general fund,
permanent improvement fund, road and bridge fund or jury fund purposes in
excess of $.80 on each $100 assessed valuation. Cities and towns having a
population of 5,000 or less may not levy a tax for any one year for any
purpose in excess of 1-1/2% of the taxable property ($1.50 on each $100
assessed valuation), and a limit of 2 1/2% ($2.50 on each $100 assessed
valuation) is imposed on cities having a population of more than 5,000.
Hospital districts may levy taxes up to $.75 on each $100 assessed
valuation. School districts are subject to certain restrictions affecting
the issuance of bonds and the imposition of taxes.

Governing bodies of taxing units may not adopt tax rates that exceed
certain specified rates until certain procedural requirements are met
(including, in certain cases, holding a public hearing preceded by a
published notice thereof). Certain statutory requirements exist which set
forth the procedures necessary for the appropriate governmental body to
issue and approve bonds and to levy taxes. To the extent that such
procedural requirements are not followed correctly, the actions taken by
such governmental bodies could be subject to attack and their validity and
the validity of the bonds issued questioned.

Property tax revenues are a major source of funding for public
education in Texas. The method for funding public education in Texas has
undergone material changes over the last five years. In 1993, the Texas
legislature adopted legislation that attempts to reduce the disparity of
revenues per student between low-wealth school districts and high-wealth
school districts by causing the high-wealth school districts to share their
ad valorem tax revenues with the low-wealth school districts. In January
1995, the Texas Supreme Court affirmed the constitutionality of that
legislation. Subsequently, the Texas Legislature created a new $170 million
school facilities construction funding program designed primarily to help
property-poor school districts build and renovate school facilities. The
money for this program will come from the General Revenue Fund of the State

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of Texas. There is no assurance that further challenges to this method of
funding public education will not be mounted in Texas.

Though the 1997 legislative session began with a proposed overhaul of
the current property tax system, the changes that ultimately were adopted
essentially leave the state's property tax system unchanged. The Texas
legislature adopted a scaled-back property tax relief bill that became
effective September 1, 1997. The most significant form of tax relief
adopted is that school districts will grant an additional state-mandated
$10,000 exemption for each qualified homestead, increasing the total
homestead exemption to $15,000 of assessed valuation, up from the current
$5,000 that is allowed. Texas voters approved a constitutional amendment
affirming this change in the law in an August 9, 1997 election. The
additional $10,000 exemption will be effective for the 1997 tax year. The
constitutional amendment also permits homeowners who are over 65 years of
age to transfer the school tax ceiling they enjoy with respect to a house
to a different house if they change primary residences. A $1 billion budget
surplus is to be used to fund the property tax relief. Additionally, the
new law provides for school districts to receive state aid to help pay
principal and interest on eligible new bonds whose proceeds are used to
construct instructional facilities. Moreover, all revenue from the state
lottery will now be dedicated to the foundation school fund. The new
legislation also allows homeowners to defer paying their taxes when the
value of their houses increases by more than five percent a year.

VIRGINIA

RISK FACTORS--The Constitution of Virginia limits the ability of the
Commonwealth to create debt. An amendment to the Constitution requiring a
balanced budget was approved by the voters on November 6, 1984.

General obligations of cities, towns or counties in Virginia are
payable from the general revenues of the entity, including ad valorem tax
revenues on property within the jurisdiction. The obligation to levy taxes
could be enforced by mandamus, but such a remedy may be impracticable and
difficult to enforce. Under section 15.1--227.61 of the Code of Virginia, a
holder of any general obligation bond in default may file an affidavit
setting forth such default with the Governor. If, after investigating, the
Governor determines that such default exists, he is directed to order the
State Comptroller to withhold State funds appropriated and payable to the
entity and apply the amount so withheld to unpaid principal and interest.
The Commonwealth, however, has no obligation to provide any additional
funds necessary to pay such principal and interest.

Revenue bonds issued by Virginia political subdivisions include
(1) revenue bonds payable exclusively from revenue producing governmental
enterprises and (2) industrial revenue bonds, college and hospital revenue
bonds and other "private activity bonds" which are essentially non-
governmental debt issues and which are payable exclusively by private
entities such as non-profit organizations and business concerns of all
sizes. State and local governments have no obligation to provide for
payment of such private activity bonds and in many cases would be legally
prohibited from doing so. The value of such private activity bonds may be
affected by a wide variety of factors relevant to particular localities or
industries, including economic developments outside of Virginia.

Virginia municipal securities that are lease obligations are
customarily subject to "non-appropriation" clauses. See "Municipal
Revenue Bonds - Lease Rental Bonds." Legal principles may restrict the
enforcement

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<PAGE>
of provisions in lease financing limiting the municipal issuer's ability to
utilize property similar to that leased in the event that debt service is
not appropriated.

No Virginia law expressly authorizes Virginia political subdivisions
to file under Chapter 9 of the United States Bankruptcy Code, but recent
case law suggests that the granting of general powers to such subdivisions
may be sufficient to permit them to file voluntary petitions under Chapter
9.

Virginia municipal issuers are generally not required to provide
ongoing information about their finances and operations, although a number
of cities, counties and other issuers prepare annual reports.

Although revenue obligations of the Commonwealth or its political
subdivisions may be payable from a specific project or source, including
lease rentals, there can be no assurance that future economic difficulties
and the resulting impact on Commonwealth and local government finances will
not adversely affect the market value of the Virginia Series portfolio or
the ability of the respective obligors to make timely payments of principal
and interest on such obligations.

The Commonwealth has maintained a high level of fiscal stability for
many years due in large part to conservative financial operations and
diverse sources of revenue. The budget for the 1996-98 biennium submitted
by Governor Allen does not contemplate any significant new taxes or
increases in the scope or amount of existing taxes.

The economy of the Commonwealth is based primarily on manufacturing,
the government sector (including defense), agriculture, mining and tourism.
Defense spending is a major component. Defense installations are
concentrated in Northern Virginia, the location of the Pentagon, and the
Hampton Roads area, including the Cities of Newport News, Hampton, Norfolk
and Virginia Beach, the locations of, among other installations, the Army
Transportation Center (Ft. Eustis), the Langley Air Force Base, Norfolk
Naval Base and the Oceana Naval Air Station, respectively. Any substantial
reductions in defense spending generally or in particular areas, including
base closings, could adversely affect the state and local economies.

The Commonwealth has a Standard & Poor's rating of AAA and a Moody's
rating of Aaa on its general obligation bonds. There can be no assurance
that the economic conditions on which these ratings are based will continue
or that particular bond issues may not be adversely affected by changes in
economic or political conditions.

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<ARTICLE> 6

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